A total of £3.94 billion of property wealth was unlocked through equity release last year, with £1.08 billion in the last three months, an unprecedented £136 per second. Equity release is popular – but is it actually a good idea for the over-55s?
In the past, equity-release schemes have been accused of ripping off the older generation, leaving them without a home or saddling their family with large debts.
Fortunately, the Equity Release Council now requires all its members’ products to adhere to four standards:
- No negative equity guarantee — meaning that even if the amount outstanding at the end exceeds the property’s value, the person’s estate will not be lumbered with the bill.
- The product can be ported to another suitable home.
- The right to remain in your property for life or until you move into care.
- Interest rates on lifetime mortgages must be fixed or capped.
What is equity release?
It is a fancy name for products that let the over-55s convert some of the wealth locked up in their property into a tax-free lump sum, to spend as they wish.
They could become a Bank of Mum and Dad to help their family buy a home of their own; they could fund their own property improvements; or they could splurge on a better lifestyle during retirement.
Lifetime mortgages are the most popular form of equity release in London, with take-up increasing by 12 per cent last year.
These products let homeowners who are aged 55-plus take out a mortgage on their property without needing to pay interest. However, that interest rolls up and is repaid when the homeowner, or their surviving partner, dies or goes into long-term care.
In the meantime, the homeowner retains ownership of the home, can often ring-fence some of its value as an inheritance and can have the flexibility to take additional lump sum payments at a later date, or pay off some of the interest to increase the amount they pass on.
The other option is a home reversion plan. The homeowner sells a percentage of their property at a discounted rate, while still being able to live there for the remainder of their life. Often these products have a minimum age requirement of 60 or 65.
Sandra, from Sidcup, used equity release to help her daughter and three grandchildren find somewhere to live.
“My daughter has been going through a difficult time recently and was struggling,” explains Sandra. “The whole process was a lot easier than I’d expected. I’ve already recommended equity release to friends. In my view, you should enjoy money while you’re still alive.”
What’s the catch?
While these schemes let you cash in some of the value of your home today, you will have to pay interest on the money released and this will affect your financial legacy.
Therefore it is essential you get independent advice and consider talking to your family before you proceed.
The interest rate on lifetime mortgages has fallen substantially in recent years but it is higher than standard mortgages.
For example, OneFamily’s best fixed rate for its lifetime mortgage on a loan of up to 30 per cent of your property’s value is 3.61 per cent. And because the interest payments get added to the loan, the loan amount grows quickly.
For example, if you withdrew £25,000 from your home at this interest rate, you would owe £35,000 after 10 years and £50,000 after 20.
If you needed a product with an interest rate nearer five per cent, your £25,000 loan amount would double in 15 years.
To reduce the speed at which your liability grows, consider using a drawdown lifetime mortgage.
Instead of taking out one big lump sum at the start, these products let you tap your property’s value for lump sums as you need them. While you may still withdraw the same amount over your lifetime, the interest you accrue will be less. Another option is to choose a product that lets you pay interest on your loan.
The Equity Release Council has 300 member firms and 900 individuals registered. Make sure your provider is one of them. And remember that being cash-rich rather than equity-rich can affect your entitlement to benefits.
Similarly, if you currently receive home care, funded to some extent by your local council, you may be asked to start paying for it, or to contribute more. Check out these issues first with a specialist adviser.
Equity release isn’t the only way to take a lump sum from your home — you could downsize instead.
Even after paying stamp duty and other moving fees, this could still be far cheaper as there is no new mortgage to accrue interest and the homeowner can release the full market value tied up in their home when they sell.
If you are thinking of equity release as a way to supplement your income, do a personal audit first.
Use Age UK’s benefits check (ageuk.org.uk) to see if you are entitled to extra help, and contact the Pension Tracing Service if you think you’re missing an income stream.
If your property is large, also consider renting out a room as you can earn up to £7,500 a year tax free — again, check if it affects your benefits.
Falling interest rates and better standards have seen equity release’s popularity soar.
It can be an easy way to get a tax-free sum to help family on to the property ladder or to see out your final days in luxury. But it is not for everyone. Take advice, take your time and shop around before you sign.