40,000 homeowners use equity release as interest rates drop
Nearly 40,000 households used equity release products in the first half of 2018, according to data from the Equity Release Council. But is it a good idea for your finances?
Equity release allows homeowners to access capital held in their homes, often through a lifetime mortgage, home reversion scheme or a retirement interest-only mortgage.
The increase in the number of home owners using equity release comes as providers offer greater choice in products and cheaper rates, the Equity Release Council claims.
Here, we take a look at the data and offer advice on how equity release plans work.
Equity release products on the rise
In August, there were 139 equity release products available to homeowners, up from just 58 two years ago.
The cost of equity release products is dropping, too. In July 2017, average interest rates fell to 5.22%, down from 5.27% last year and 5.96% two years ago.
And there are also signs that borrowers are being offered greater flexibility, with four in five products now offering penalty-free voluntary or partial repayments.
The Equity Release Council claims that this means ‘property wealth is emerging as a mainstream retirement funding choice’.
How much are people borrowing?
The data shows that 38,912 households used equity release products in the first half of 2018, with 21,490 new plans agreed.
That’s up by more than a quarter on the 16,805 recorded a year earlier.
Homeowners seeking to unlock of lump sum from their properties borrowed on average 30.8% of their housing wealth.
Drawdown customers, meanwhile, took less than a fifth (18.2%) of their property’s value as an initial advance.
£390m released to help family members
Separate research from the financial services provider OneFamily found that homeowners with lifetime mortgages released £390m to gift to family members in the space of a year.
Much of this capital was used to help a family member purchase their first home.
The research found that homeowners aged over 55 (with a property valued £379,000 on average) would only need a loan of 6% to help a family member fund a deposit.
Interestingly, two thirds of lifetime mortgages taken out to offer financial help have their interest paid monthly, meaning the family members benefiting could in theory be making the repayments.
Equity release options
Equity release allows homeowners over 55 to access cash tied up in their homes.
Cash released can be taken as a lump sum or a ‘drawdown’ policy – when it’s delivered in several smaller payments.
Traditionally, equity release comes in a couple of different forms:
- Lifetime mortgage: You borrow a proportion of the value of your home and interest is charged on this amount. Interest is usually ‘rolled up’ into the debt, so you won’t usually pay anything back until you sell your home or die. This allows flexibility, but costs can quickly spiral.
- Home reversion plan: You sell a stake in your property in return for a cash lump sum. This allows you to retain the right to live in your home and free up cash, but the amount you surrender will be significantly higher than the cash payment you receive.
Retirement interest-only mortgages
There’s now a new kid on the block. Retirement interest-only (RIO) mortgages are enjoying a surge in popularity due to the Financial Conduct Authority (FCA) removing some of the red tape around them earlier this year.
The FCA believes RIO loans could help remedy the issue of ‘mortgage prisoners’; people locked into historic interest-only mortgages with no way of repaying the balance as they come to the end of the loan.
With a RIO mortgage, you’ll pay set interest on your loan each month rather than the interest being rolled up into your outstanding balance. This leaves you in greater control of the costs but means you’ll need some form of income. As with a lifetime mortgage, the loan will be paid off once you die or move into care.
RIO loans are offered by standard mortgage lenders (rather than equity release advisers, as with lifetime mortgages).
Is equity release a good idea?
There are pros and cons to equity release schemes, so it’s important to fully understand the terms and conditions of any product you’re considering.
Whether equity release is right for you will depend on your current financial circumstances, as well as what you need the money for and whether you’re comfortable decreasing the size of your estate.
Below, we explain the differences between the most common schemes.
How retirement interest-only mortgages compare
|Retirement interest-only mortgage||Equity release (home reversion) scheme||Lifetime mortgage|
|Monthly payment||You pay the interest on your loan each month||No payment – provider owns a percentage of the property instead||No payment – interest is ‘rolled up’ as part of the loan|
|How do you pay the money back?||Mortgage is paid back when you die or move into long-term care||Provider gets their share of the property when it is sold||Mortgage and interest is paid back when you die or move into long-term care|
|Benefits||You can unlock some of the equity in your home to pay off outstanding debt or avoid downsizing||You can access cash without any immediate repayments||You can access cash without any immediate repayments|
|Drawbacks||You’ll need a reliable income to pay the interest and your home will be sold off to repay the loan when you die or enter long-term care||You’re selling off a large chunk of your home straight away for (in some cases) significantly less than it’s worth||The debt will quickly eat into your equity as interest grows, early repayment fees could apply|
Advice on borrowing in retirement
If you’re interested in equity release, the Which? Money Helpline can offer advice on how the different schemes work.
Which? Mortgage Advisers is unable to provide advice on equity release, but if you’d like guidance on your retirement interest-only mortgage options, you can fill out the form below for a free call-back.
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