The number of people opting to release equity from their homes has leapt by 80% in the past two years, but for some it could cause more financial problems than it solves.
According to trade body the Equity Release Council, in the first half of 2018, almost 40,000 older homeowners turned their bricks and mortar into cash via new plans or withdrawing more from existing ones.
The choice of products has more than doubled from 58 in 2016 to 139 this August. For every £1 of savings withdrawn through flexible pension payments in the past 12 months, 50p of housing wealth was unlocked using equity release, up from 40p a year earlier.
Equity Release Council chairman David Burrowes said: “These figures highlight the rise in new products and increased product flexibility, which is helping older homeowners to fulfil a host of pressing personal, social and financial needs.”
Will Hale, chief executive of independent equity release advisers Key, added: “Around 28% of customers are using their property wealth to help families as well as to boost their retirement finances, with some looking to property before pension funds.”
And demand is likely to continue increasing, as an aging population seeks ways to supplement pension income, clear debts, meet the cost of long-term care or give financial help to children and grandchildren.
Equity release takes two main forms: fixed or capped-rate lifetime mortgages, with interest rolled into the debt or repaid monthly, and home reversion schemes. The cash can be taken as a lump sum or drawn down in smaller amounts.
Lifetime mortgages, which are available to those aged 55 and over, allow the holder to borrow a proportion of their home’s value. The interest is usually added to the debt, meaning there is nothing to pay back until they sell up or die. However, as interest compounds, the total can rise surprisingly quickly.
After 25 years, someone releasing £50,000 from a £250,000 home at a rate of 6% would owe more than £223,000. After 35 years, the debt would have grown to over £406,000, while there is no way of predicting the value of the property.
With a lifetime interest-only mortgage, the interest is paid monthly, making it more cost-effective. However, the repayments will eat into income, and the loan itself still needs to be repaid when the owner dies or goes into care.
To ensure the debt can be cleared regardless of the direction of house prices, most providers will release only a fixed percentage of the current value based on the applicant’s age. A 60-year-old might be able to realise 20%, while a 65-year-old could access 25%. Someone very elderly or in extremely poor health might get 60%.
Under home reversion schemes, which are generally open to those aged 60 and above, a proportion of the property is sold. The plan holder retains the right to live there, but the cash freed up is significantly less than the value of the percentage surrendered. Some schemes will take as much as 70% of value for just a 20% advance.
All plans regulated by the Equity Release Council have a no negative equity guarantee, so the holder cannot end up being made to repay more than their home’s eventual value, and four out of five now allow penalty-free full or partial repayments.
Equity release is getting cheaper too. In July, the average lifetime mortgage interest rate was 5.22%, down from 5.27% a year before and from 5.96% in July 2016, but this is still more expensive than most conventional mortgages. And plans remain relatively costly to set up, with fees as much as £1,500-£3,000.
Equity release could affect your tax position and entitlement to means-tested benefits, and will significantly reduce the value of your estate.
If you use it to consolidate other debts, you could end up repaying considerably more overall, and if you opt for a lifetime interest-only mortgage and fail to keep up the repayments, you could lose your home.
Depending on your situation, downsizing to a smaller property or remortgaging with a traditional loan might be a better option.
If you are considering equity release, get impartial advice from a charity such as Step Change (stepchange.org), which is free of charge, or from an independent financial adviser.
Mr Burrows said: “As customers navigate their way through a growing range of product choices, the appropriate advice, guidance and support is needed to weigh up the various benefits, costs, flexibilities and protections to ensure they are suitable to meet current and future needs.”
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