An increasing number of older people are considering dipping into the value stored in their homes to help with the UK’s cost of living crisis.
Some want cash to upgrade their boiler or install solar panels for more cost-effective energy, according to equity release advisers such as Samantha Bickford at Clarity Wealth Management. Others are wondering how they can help family members struggling with rising prices.
The most common equity release deals are mortgage-based products that are loans secured against your home. Typically, there are no monthly repayments – the loan, including the built-up interest, is repaid from the sale of the property when you die or go into long-term care. These are known as lifetime mortgages.
Bickford recently helped a couple take out a lifetime mortgage on their property to release cash to pay off their daughter’s home loan because rising interest rates meant she was unable to remortgage.
“If homeowners cannot heat their homes or afford a warm meal due to their fear of the cost of living crisis, then using the cash tied up in their property may offer a solution to a problem they could not otherwise solve,” Bickford said.
Stephen Lowe at the retirement specialist firm Just Group says during the past year more people have been considering using housing equity to help their families.
“Often this is to help them get on to the housing ladder or move to a bigger property but we’ve started to see the resilience of household balance sheets coming under pressure, and parents exploring how they might help their children and grandchildren,” he said.
Years of house price growth mean that millions of older people have seen their property rise in value sharply.
Equity release is available to over-55s and allows homeowners to borrow a lump sum or regular smaller amounts against the value of their home from specialist lenders, without having to sell up or downsize.
With many lifetime mortgages you can make repayments if you wish, and it is probably a good idea to do that if you can.
These products are increasingly being seen by many as a way of giving family members their inheritance early, at a time when they most need it.
A record number of new equity release plans were taken out between July and September – almost 13,500 – with new customer numbers increasing by a third year on year, according to the trade body the Equity Release Council.
Total lending has risen by 40% since 2021, and the average person now borrows £133,770 (that is for lump sum lifetime mortgages).
However, this increased appetite for releasing equity could barely have come at a worse time when it comes to the price of new lifetime mortgages, whose rates have reached “eye-watering” levels, according to Aaron Strutt at the mortgage broker Trinity Financial.
One of the biggest downsides of equity release has always been the cost. With a lifetime mortgage, the interest owed on the loan is usually added to the sum borrowed. You are then charged interest on this larger amount the following year, so the amount owed can quickly mount up.
With the interest compounding over many years, and sometimes over decades, the total amount owed may eventually all but obliterate the value of a property by the time the borrower dies.
In October 2020, the average rate for an equity release loan was 4.01%, according to figures from Defaqto, while the lowest rate available was 2.23%. Now, the lowest rates available are at about the 6.7% mark, while the highest are above 9%, according to a price check this week.
“To say that lifetime mortgage costs have increased dramatically would be an understatement,” Strutt said.
“The key thing that makes the impact of these higher lifetime mortgage rates so significant is the cost of servicing the interest, and if it is rolled up, the compounding of interest will erode equity in properties more quickly.
“The borrowed amount will pretty much double after 10 years and will reach three times the amount in the 15th year.”
While lifetime mortgages are being promoted as a solution to a lack of income during the cost of living crisis, Strutt says it is crucial that borrowers fully understand the impact of this rolled-up interest.
“These products may still be the only option or the most suitable route for some but people need to go into these transactions with a full understanding of the implications of the current rates.”
Seek reliable, regulated advice from a member of the Equity Release Council.
There are myriad terms and conditions, and it is essential that you know exactly what you are getting into, and that you discuss the implications with your family.
Products offered by Equity Release Council member firms have a “no negative equity guarantee”, which means your estate will never owe more than the value of your property. There are also ways to keep costs down.
Many deals allow you to pay off some of the capital of your loan, or the interest, so the cost does not compound as much. While most loans have early repayment charges, some disappear after about 10 years, but it can be as little as five, according to Will Hale, the chief executive of Key, the UK’s largest later-life lending adviser.
The most flexible deals are those that include a feature called drawdown, where you take out smaller sums when needed, with a reserve to call on if you need it in future.
You will pay less this way because you only accrue interest on the money you have released.
Also consider portability: can you take the loan with you to every kind of property you may one day want to move to, including a retirement village, for example? Are you able to repay without penalty if your circumstances change?
Hale says: “A good specialist adviser will talk a customer through all their options including downsizing … While equity release will be right for some people, there is no one size fits all answer and it is vitally important that people consider what works for them now and in the longer term.”
For most people, the most financially effective way of freeing up cash will be to move to a smaller property or cheaper area.
