Updated 23 April 2020
Many older people turned to their properties as a source of cash last year, due to the rising costs associated with later life. In 2018 homeowners borrowed nearly £11 million a day against the value of their homes, via the process known as ‘equity release’. Article by Nick Green.
Borrowing via equity release is at an all-time high in the UK, and increasing at an unprecedented rate. Equity release is usually achieved via a product known as a lifetime mortgage, which enables a homeowner to borrow a lump sum that is then repaid from the eventual sale of their home. The £11 million per day borrowed in 2018 represents a rise of nearly a billion pounds on the previous year. Figures from the Equity Release Council show that in 2017 around 33,000 homeowners aged over 55 borrowed £3.1 billion against their homes, which in 2018 rose to a total value of £3.9 billion, with the number of borrowers also up (to 44,000).
Many investment firms take the view that the equity release boom will continue in the short to medium term. Legal & General boss Nigel Wilson, whose company has made a move into the lifetime mortgage market, believes the amount borrowed could reach £20 billion a year.
According to chairman of the Equity Release Council, David Burrows, the flexibility of the process is driving the upward trend. He commented, ‘These figures highlight the rise in new products and increased product flexibility, which is helping older homeowners fulfil a host of pressing personal, social and financial needs.’ Other significant factors include the rising cost of care, the bullish property market which means that the bulk of people’s wealth is tied up in their home, and greater access to information that makes homeowners more aware of their options.
Although equity release is an increasingly popular way to free up money to spend in retirement, it does have significant drawbacks. In terms of value achieved, it is typically far less efficient than the simple sale of a home. Homeowners using equity release should therefore consider the following negative factors.
The rate of interest you pay for a lifetime mortgage is usually fixed for the full term of the plan. This means the interest charges can quickly add up. In some cases, if the home isn’t sold for a long time after the loan is taken out, the total debt could become larger than the value of the home. Most lifetime mortgages are now capped, to ensure that the repayment sum is never more than the value of the home – but it could eat up all the remaining value, leaving nothing for your family to inherit.
One solution to this can be to take out a serious of smaller lifetime mortgages, so that compound interest isn’t payable on the whole sum for the entire mortgage term.
As an alternative to a lifetime mortgage, there is another equity release product called home reversion. This involves selling a share of your house to the provider, while guaranteeing your right to live in the property until it is sold. This does however carry the risk that when the property is eventually sold, the people that stand to benefit from the remaining share could miss out on the benefit of any future rise in house prices.
The obvious alternative to equity release is to downsize your property. This allows you to benefit from the full value of your home when it is sold. However, experts recommend that you need a minimum amount of equity (the proportion of your home’s value that you actually own mortgage-free) for downsizing to be worthwhile. Nick Morrey, mortgage and protection consultant at John Charcol, gives the example of someone with a house valued at £600k value who has a £200k mortgage. ‘[They] can release £400k equity, which is feasible for a two bed house in London. However, a £180k house in Sheffield with a £125k mortgage outstanding means the homeowner can only release £55k equity.’ In short, if there isn’t much excess money left over after buying a smaller home, downsizing won’t be a practical option.
Equity release looks set to grow in popularity as the cost of care and retirement continues to rise. As with any financial decision, it is always important to speak to an independent adviser to assess your options and work out which is best for you.
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