Growth-proofing the equity release rebound

By Dr Darrel Welch, MIAC’s Managing Director of Modelling & Analytics tells us how rethinking tech will be key to lenders’ future success as equity release takes the mortgage world by storm

2021 was an explosive year for equity release.

It saw a borrowing boom in the sector of 24%, with annual lending growing year-on-year from £3.86 to £4.8 billion to decidedly wipe out the record previously set in 2018 of £3.94bn.

These are some fascinating, and at times startling, figures from the Equity Release Council (ERC) – last year, up to £13 million was unlocked from properties each day. Such appetite in the LTM market could be said to follow the unrelenting escalation of house prices in recent times, with older homeowners able to reap the benefits of greater home equity.

The data indicates that house prices will continue to head heavenward. This, combined with the greater flexibility afforded by the ERC’s latest product standard requiring all equity release providers to allow customers to make penalty-free repayments on their loans, would suggest equity release will become an increasingly attractive option for many.

What does this borrowing boom mean for lenders?

Such dizzying growth means the lifetime mortgage sector finds itself at an equally exciting and complex juncture.

Modelling lifetime mortgages is already a knotty and exacting process; it’s an asset class naturally demanding more complex risk analysis as projections must be calculated far further into the future.

Now, with higher volumes of more complex asset classes and loan books, there are therefore more permutations of factors that could pose a challenge – such as mortality, drawdown, prepayment and house prices – and as things stand, the basic requirements of how to manage those risks under the Bank of England are only a bare minimum.

The question on everyone’s lips then, is how is this growth sustainable? How can the banking sector keep up this lending boom in a prudent and controlled way?

Out with the old

It’s a question we’ve concerned ourselves with here at MIAC, as we continue to focus on the challenges, risks and opportunities for innovation within this blossoming market.

Our answer? Innovating the methods of loan book management. Historically, the solutions to data management, reporting and analytics for long term exposures have taken spreadsheets as their basis. Recourse to these spreadsheet models for risk analysis has been the standard approach for many lenders for many years, but this is both an unscalable and time and resource-intensive solution.

The spreadsheet is not at home with multiple user engagement or more intuitive integration; it is not a tool designed to hold reams of information, and because of that, it’s prone to human error and diminished accuracy.

This isn’t to say that the merits of the spreadsheet are insignificant, but rather in the face of increasingly complex loan books and a sudden boom in demand that could risk bottleneck, there must be a more intelligent way to understand risk. And there is.

In with the new

Where to, then? An end-to-end database system, where data can be inputted in a variety of ways and formats and pumped out into comprehensive yet digestible reports for use across different corners of a business.

Systems already exist that are auditable, scalable and efficient. Our MIAC Vision technology is widely in use across the mortgage industry, and is now proving its worth in the LTM sector. Having deployed it in the market in partnership with one major organisation, we have now proven it to significantly improve insight and understanding of risk, far more efficiently than the pre-existing models.

A database application does not suffer from many of the restrictions posed by spreadsheet models. Vision also offers both the probabilistic and simulation approach to LTM so the user is not restricted by the assumptions implicit within the Black-Scholes option pricing approach and provides a view of the full distribution of outcomes. Equity release lenders have been asking for an end-to-end solution: to enable data aggregation, normalisation, audit, encryption, automation and reporting across their whole business.

Where next

Now armed with the technology to report on more complex calculations and manage risk, there is no reason why the equity release market cannot confidently future-proof its continuing growth. We in the business of analytics and technology are keeping pace by building future functionality into our systems.

For example we have anticipated the fast-growing need to understand environmental factors – which is especially important with longer-term asset classes – in particular a much clearer analysis of the effects of flood risk, construction type and subsidence risk on the sustainable value of assets.

As growing cohorts of homeowners over 55 are looking to release property wealth to support themselves, their loved ones or their retirement, lenders have all the tools at their disposal to comfortably keep up with demand.