Homeowners’ equity reached and astonishing £2.6 trillion last year — and that’s just in England. According to the Equity Research Council’s (ERC) latest report, of this vast sum £1.8 trillion of it belongs to households aged 55 or more.
Meanwhile, the Council warns that millions of workers with defined contribution pension plans may only receive a pension worth 15 per cent of their final salary. This means the homeowners among them are likely to be asset rich, yet cash poor, so it is no surprise that owners released a record £2.15 billion from their homes in 2016. For those hoping to use their house as an ATM, we explore the pros and cons.
What is equity release?
It’s a way of pulling tax-free cash out of your home. If you are young and have sufficient income, it is simply a case of re-mortgaging your property. But for those over 55, a growing suite of specialist products exists. The most common are lifetime mortgages. These let you withdraw a significant lump sum, or series of sums against the value of your property.
Quite how much you can take depends on your circumstances, but for once, it increases with age! Numerous websites, such as equityreleasesupermarket.com, provide free calculators which can give you a guide. Many advantages make it an increasingly popular option.
What are the pluses?
There are many when it comes to lifetime mortgages, not least that you can receive a substantial sum of money and still retain ownership of your house, so you can live there for the rest of your life or until you move into long term care.
You also have the freedom to spend the cash how you like, perhaps on that dream holiday, on a luxe new kitchen or helping the kids on to the property ladder.
There are no monthly payments to meet. The loan, plus all interest, is repaid from your estate when the last homeowner dies or moves into long term care. This structure does reduce your financial legacy. But if you have no dependents or plan on spending the lot yourself, that's less of a concern. It can also help with inheritance tax planning — but do seek financial advise first.
What are the costs?
Competition within the sector is driving the costs down. The average interest rate dropped by 0.75 per cent last year to 5.45 per cent.
Even better, data from the ERC suggest an increasing number of providers are beating the standard variable rate on a mortgage of 4.23 per cent.
Is it easy to arrange?
The process is fairly simple. To qualify you typically need to be over 55, have a home worth in excess of £70,000 and be looking to borrow up to 60 per cent of the value. The application itself usually takes about 6 to 12 weeks to complete and you will need a solicitor.
“New customer numbers and total lending reached record levels” in the first few months of 2017,” says Nigel Waterson, chairman of the Equity Release Council. “The annual rate of growth is the fastest that the sector has seen, as equity release continues its progress to becoming a mainstream retirement product among older homeowners.”
So what’s the catch?
A key concern is around how much you will leave behind. For example, if you borrow £80,000 from your home at a 5 per cent interest rate, after a year, the £4000 interest accrued increases your borrowing to £84,000. In the following year, £4,200 of interest is added. By year five, your escalating interest bill means your debt will be over £100,000. After 10 years, your borrowing will exceed £130,000. Even with house price growth, you may end up with nothing to pass on.
What else should I think about?
Benefit payments are another important consideration. Withdrawing a lump sum or regular income from your home may disqualify you from means tested benefits such as Pension Credit, Council Tax Benefit and some local authority grants. Further guidance can be found on the Council of Mortgage lenders website.
Finally, remember that lifetime mortgages have no fixed term – they are for life. Expect hefty early repayment charges if you change your mind.
Doing the sums
You can expect to pay £2,000 to £3,000. Your property doesn’t have to be mortgage free. Some people even use equity release to clear their mortgage. What it does affect is the amount you can borrow.
You need to use a RICs surveyor. Some firms roll this in to the product fee, some give cash back. There are lots of options, just like when you take out a mortgage.
Cooling-off periods for financial products are generally 14-30 days, but i couldn’t find specific reference to equity release in the Financial Conduct Authority handbook. It can take a number of weeks from application to the product starting, so there will be some time if the homeowner changes their mind.
Any top tips?
Speak to an independent financial adviser, ideally one who is a member of the Equity Release Council. See its website for a list of specialist advisers.
Make sure your lifetime mortgage meets the Equity Release Council’s standards: a fixed or capped variable interest rate, your right to remain in your property for life, your right to move the loan to another property, and a "no negative equity" guarantee.
Tell your family what you are thinking of doing. Some newer products allow you to pay off the monthly interest, or capital, to help maintain or regain your stake in the property.
Finally, think carefully about taking more than you need. Although you may get some comfort from taking a lump sum and depositing the additional cash in your bank account, the interest roll up means it may cost you dear. Drawdown products can be a better alternative. These let you take a lump sum, while leaving the surplus cash with the lender, who does not charge interest.