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Homeowners release £1bn of equity in ‘middle-class stampede’… but what are the risks?

Older homeowners are releasing an average of more than £100,000 from their properties, in what is being termed a ‘middle-class stampede’ towards equity release.  

Two separate studies found that homeowners were able to access triple-figure cash pots when taking out equity release deals- also known as ‘lifetime’ mortgages. 

This is when older homeowners take out a new mortgage on their home, allowing them to access some of the money tied up in it to spend in their later years.

Older homeowners are getting an average of more than £100,000 when they take out equity release mortgages – but there are plenty of risks involved 

The loan is paid back from the sale of the property when the owner dies or goes in to long-term care.  

Retirement lender Key Equity Release’s Market Monitor suggests that, in the first three months of this year, the average homeowner who took out an equity release plan received £103,710: that’s 25 per cent more than the £83,000 released in the first quarter of 2020. 

The total value released increased 12.8 per cent to £1.07billion. 

Key said homeowner’s cash pots had been boosted by increases in house prices, which have risen by more than 10 per cent in the year to March, according to the Office for National Statistics.

An increase in the market value of your home means the equity you can release also goes up.  

The average loan-to-value of the mortgages taken out by equity release borrowers increased by just 2 per cent, from 25 per cent in the first three months of 2020 to 27 per cent in the first three months of 2021 – and the number of plans sold actually reduced year on year. 

This suggests that increased house prices were largely responsible for the boost. 

Will Hale, chief executive at Key, said: ‘The strength of the property market driven by the extension of the stamp duty holiday […] is helping to increase the property wealth that over-55s can use for retirement planning. 

‘The average amount released at more than £103,710 demonstrates how important property wealth is in meeting customers’ wants and needs, while the rise in the average value of homes owned by customers’ shows how wealthier customers are looking to use their homes.’ 

Data from later life mortgage broker ResponsibleLife indicates an even more dramatic increase in the sums that equity release borrowers were accessing.

House price rises have helped to increase the equity that people have in their homes

House price rises have helped to increase the equity that people have in their homes

It says that the average amount released by its customers increased by 31 per cent in the 12 months to April climbing from £86,000 to £112,700.

Like Key, ResponsibleLife credited house price increases for the rise – but it also said that there had been a shift to a wealthier demographic who owned higher-value homes. 

In April, it said the average value of a home being used to secure a lifetime mortgages was 19.4 per cent higher than a year ago, at £487,000 – nearly double the UK’s average house price.

Steve Wilkie, executive chairman of Responsible Life, said: ‘There’s no doubt there has been a middle-class stampede for lifetime mortgages over the past year, thanks to interest rates sinking to historic lows.

What is equity release cash being spent on?

According to Key, 34 per cent of those who released equity used it to clear their existing mortgage, while 21 per cent made gifts to their family. This was down from 29 per cent last year.

A study by Openworks found 17 per cent of parents and grandparents were considering releasing equity from their homes to enable family to afford a house deposit specifically. This would be the equivalent of around four million people across the UK. 

Younger homeowners may have been keen to renovate during lockdown, but it appears older ones weren’t as interested. Key said the proportion of customers who spent equity release money on home improvements more than halved from 63 per cent in the first three months of 2020 to 31 per cent in the first three months of 2021.  

Unsurprisingly, the amount spent on holidays fell to just 1 per cent, down from 8 per cent the previous year.

‘Wealthier homeowners have cottoned on to how rates have come down and now see lifetime mortgages as an affordable way to improve their standard of living in retirement. 

‘Gone are the days when they were considered a product of last resort. That couldn’t be further from the truth now.’ 

The reputation of equity release has improved in recent years, as the safeguards surrounding the industry have become more robust. However, it is still a serious financial commitment which can leave homeowners with significant interest bills which mount up the longer they have the mortgage.  

But for those who were already considering it, is now a good time to take out a plan? 

Rock-bottom interest on savings and general economic uncertainty means it might be tempting for those with wealth tied up in their home to try and harness it. 

‘Low interest rates on savings and economic volatility mean that homes are increasingly becoming our primary and most significant financial asset,’ says Paul Shearman, propositions director at financial adviser The Openwork Partnership. 

‘As a result, more and more people are turning to Lifetime Mortgages to release some of the value that has built up in their home over the years. 

‘This looks like a trend that’s set to continue but it is crucial that older homeowners get the right financial advice and examine all their options before taking out equity release.’

He adds that borrowers should consult with their families, as the need to pay back the equity release loan will affect their inheritance. 

It’s cheaper than ever to borrow

One factor that might prompt borrowers to consider equity release is that there are lots of equity release products on the market right now, which has led to lower interest rates. 

‘The market now offers a record number of products and features, enabling advisers to provide more flexible solutions to suit people’s needs,’ says Claire Singleton, chief executive of Legal & General Home Finance. 

‘This year we have also had much lower rates, which clearly make accessing property wealth a more viable option for customers who want to remain in their homes, rather than downsize to a smaller property.’

According to Moneyfacts, the number of equity release deals exceeded 500 for the first time on record in late April.

Equity release checklist  

Gerard Boon of Boon Brokers outlines the seven essential things to look out for when choosing an equity release product.  

1. Is your lender registered with the FCA, and a member of the ERC? Always ensure your lender is registered with the Financial Conduct Authority, and that they are a member of the Equity Release Council.  

This offers you protection as it means they are regulated. You are at risk of being mis-sold a product without any right to compensation if you do not choose an FCA-registered lender.

2. A no negative equity guarantee is essential. A member of the ERC will offer a no negative equity guarantee and competitive, capped or fixed interest rates. The absence of these guarantees was the main cause of historic issues with equity release products.

3. Ensure you have a right to remain and a right to move. An issue some people find after taking out an equity release product is that they are unable to move to another property. This may not be your plan, but without a crystal ball you want to make sure you have options and flexibility in case circumstances change.

4. Get a clear breakdown of costs so you can compare like-for-like. Any reputable lender should be happy to provide you with a breakdown of costs, so you can compare different options. Using a broker can be really helpful, as they can do this comparison for you and explain the details.

5. Be clear on whether there are early repayment charges. Find out exactly what these are as some can be extremely high.

6. Run away from anyone offering loans before knowing your circumstances. If a company offers you a large loan sum without having collated detailed information about your circumstances and financial situation, you should be very wary of them.

7. Budget for extra costs. There are numerous upfront costs associated with equity release, including valuation fees, arrangement fees, legal fees, completion fees and financial advice fees – although a few brokers offer our services free of charge. Be sure you know what to expect.   

The average equity release interest rate was 4.07 per cent, down from 4.23 per cent a year earlier and 6.15 per cent in 2016.

However Katie Brain, consumer banking expert at Defaqto, says the very lowest interest rates available are around 2.75 per cent. 

The options available have also become more flexible. Lots of plans now allow borrowers to make overpayments up to a certain limit, for example, or to ‘roll up’ interest so that monthly repayments are not required – though the latter can mean that debt increases quickly.

Drawdown plans, where borrowers receive their equity in stages rather than all in one go, can help borrowers to reduce the interest they pay. 

‘The drawdown facility can be a popular option as it means the borrower can draw funds down as and when they need to, so interest is not charged until that point,’ says Brain. 

Some equity release borrowers use the funds to enjoy their retirement - although holidays were unsurprisingly not one of the top ways that people spent their pots this year

Some equity release borrowers use the funds to enjoy their retirement – although holidays were unsurprisingly not one of the top ways that people spent their pots this year 

‘This means less interest is added to the loan than if the whole amount was taken to start with, where interest is rolled up from day one. However the interest rates are slightly higher to include this facility.’

However, buyers who decide on this option should be wary of interest rate rises. 

‘The drawback is that the interest rate payable for the drawdown is based on the interest rates available at the time of the drawdown application,’ says Gerard Boon, of mortgage broker Boon Brokers.

‘Therefore, the borrower may not have access to the same interest rates that were available when they first borrowed the initial equity release sum,’ 

Of course, rates could fall as well as rise – and some think that now is not the best time to take out an equity release mortgage because rates could go even lower.

‘So many lenders are entering the equity release arena with good rates, and more advisors are upskilling to give the relevant advice, which is resulting in a better, more competitive marketplace for consumers,’ says Matt Coulson, of broker Heron Financial. 

‘However, I suspect that we’re just scratching the surface and it’ll only continue to improve. If you can hold off, it might be better in the long run seeing where this goes.’ 

Equity release isn’t the only way to free up funds 

Equity release has historically suffered from a bad reputation, due to the mis-selling of some products when it first launched in the 1990s.

Getting professional advice is now a legal requirement when taking out a plan, to make sure that borrowers understand what they are taking on. 

With the pandemic having had such an impact on people’s finances, getting an in-depth financial assessment could be more important than ever.

‘The pandemic has had a huge strain on people’s finances and retirement plans, so seeking professional advice before proceeding is essential,’ says Singleton.

If you want more money to play with in your retirement, another option is to simply buy a smaller or less expensive home and use the profits from selling your old one to live on. This has the significant advantage of not incurring interest.

The pros and cons of equity release 
Pros   Cons 
Provides cash or income from your own home Reduces the capital value of your estate
Stay in your own home  May impact the amount of tax you pay or benefits you receive 
No negative equity guarantee  Set-up costs and early repayment charges 
Opportunity to leave some equity for inheritance  Value of the remaining equity in estate may mean that you have to sell it if you need to go into a care home (current asset limit is £23,250) 
Highly regulated financial product – providing confidence for the consumer   
By Defaqto’s Katie Brain 

Dominic Agace, chief executive of leading estate agents Winkworth, said: ‘Equity release can be a great option, allowing you to stay in your home, while spending your well-earned gains.

‘However, I don’t think there is ever a ‘good’ time to do this, as ultimately, it’s a long-term debt that will ride through peaks and troughs in the property market cycle.

‘It really has to be a personal decision based on your circumstances. I do worry that equity release gets in the way of doing the right thing, which may well be to rightsize, if the kids have flown the nest and extra rooms are no longer needed.’

‘Why not sell and buy something more suitable for living in retirement, releasing the same money but without interest rate charges? These are typically much higher than normal mortgage interest rates.’

For borrowers who are worried about how they are going to fund their retirement, seeking financial advice may help them uncover cheaper options than a lifetime mortgage – or even some that don’t cost them anything at all. 

‘Each year our advisers meet people struggling on low incomes. Part of our advice service in an assessment is to ensure people are claiming their full entitlement to state benefits,’ says Simon Gray, managing director at equity release advisory firm HUB Financial Solutions. 

‘We have uncovered thousands of pounds for people which in some cases has meant they have not then needed to use equity release.’

Ultimately, with the relatively high costs involved, Brain says equity release should still only be used as a last resort option for funding your retirement.

‘Equity Release should really be the last option because interest is rolled up, and therefore the debt can increase quickly. 

‘For example; a loan of £50,000 at an interest rate of 2.75 per cent, the total debt would be £86,021 after 20 years.

‘If the borrower can afford to make monthly repayments, a Retirement Interest Only mortgage could be a good alternative.’   

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