Equity release products have made a surprise comeback after last year’s mini-Budget market turmoil.
Data from the Equity Release Council’s spring market report showed product availability reached record levels in the second half of 2022, despite the property market’s slowdown.
“Modern equity release is an incredibly versatile product,” said David Burrowes, chair of the Equity Release Council. “People can choose whether they want to make repayments without fear of losing their homes, and since this feature was embedded into Equity Release Council standards, we have seen people’s usage grow and their interest savings add up.”
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“A nation where so many pensioners struggle to afford a moderate standard of living simply cannot ignore the potential for property to help bridge the gap,” added Burrowes. “Equity release could make a decade of difference or more to someone whose pension income might otherwise only cover a basic lifestyle.”
The Equity Release Council’s research shows that “the average single pensioner’s income falls just short of what is needed to support a minimum standard of living”.
“However, by boosting their income via equity release, they could afford a moderate lifestyle for 12 years or five years of living in comfort,” said Burrowes.
Equity release products allow homeowners over 55 to borrow against their home’s value to “release” cash. Equity release hit a new lending high of £5.85bn in 2022, data from Key Later Life Finance showed, a 27% increase from the year before.
Plan sales grew by 25% compared to last year to 52,295 – that’s 4,300 plans being sold a month. Including borrowing from existing customers via drawdown and further advances, total borrowing hit £6.3 billion.
But even though equity release might seem like an easier and speedier way to get cash, and selling and moving are an organisational headache, downsizing could potentially be a better way to hold on to your money.
The latest English Housing Survey showed the number of homeowners with at least two spare bedrooms jumped to 8.25 million – an increase of 959,000 since 2017. That takes the number of unused bedrooms in occupied homes in England to 16.5 million – and that doesn’t take into account homes with one spare room.
Moving home could make life more comfortable financially, but many seem reluctant to do so. It’s understandable, moving is a hassle. But as well as freeing up the number of larger homes, downsizing could provide valuable income and prove a better alternative to an equity release plan.
What is equity release?
Equity release products offer a way to access the money you have tied up in your home. You can take the money you release as a lump sum or in instalments throughout a set period of time. They are only available to those aged over 55. Your home must be worth at least £70,000 and you must want to release at least £10,000.
There are two main equity release products – lifetime mortgages and home reversions.
Lifetime mortgages are available for those aged 55 and over. These allow you to take out a loan secured on your home as long as this is your main residence. You do not need to repay it until after you die or go into care, and you can still continue to live in your home, however you remain responsible for insuring and maintaining it.
You can choose to remain one lump sum or opt for a drawdown, where you take smaller sums over time.
Interest rates on the products range from between 4 to 7%. The rate is fixed and calculated based on what you borrowed. You can choose to repay it gradually or have it “rolled up” and added to the original loan amount at the end. If you choose a drawdown you only have to repay based on what you took.
So, if you take out a £25,000 lump sum with an interest rate of 4.5%, the interest at the end of the first year would be £1,125, leaving you with a balance of £26,125. At the end of the second year you’d have to pay 4.5% interest on that sum (£1,175.60) which would make the amount owed after two years £27,300.
On a larger scale, releasing £300,000 through an equity-release mortgage priced at 4.5% would cost almost £270,000 in interest, assuming none of the money is repaid until the homeowner’s death 20 years later.
The second product is home reversion. These are available to those aged over 65. With a home reversion plan you sell a portion of your home for a tax-free lump sum, or for instalments. You can continue to live in the property and once it’s sold when you die or move into care, the proceeds are split based on the percentages you and the lender own.
Typically the lender will buy the portion of your home at below market value, because they’re allowing you to continue living there rent free. You’ll usually get between 30% and 60% of what the portion of your home is actually worth.
This means if you sell 30% of your home, you’ll be getting significantly less than you would if you sold it entirely.
All money released on both products is tax-free. You can use an equity release calculator to figure out how much you’d be getting and what interest you would be paying.
What are the risks of equity release?
The main risk is how quickly interest compounds. The amount you owe could come close to or even surpass the value your home sells for, leaving those who inherit your assets with a bill to pay, significantly eroding the value of your estate.
Interest rates are also on the rise, which will make repayments more expensive if you choose to lock into a deal now. Currently products charge between 4% and 7%, but with further rates rises on the cards these could increase.
Equity release might seem an easy and appealing way to get some extra cash compared to downsizing. However a comparison of upfront fees overlooks the long-term cost of equity release. If you take out an equity release product aged 55 and you don’t move out of your home until you’re in your mid-80s, this would mean 30 years of accrued interest.
There are also some fees to consider. You’ll need to pay to get the property valued, and for basic legal advice. It’s also worth getting independent financial advice for your specific circumstances.
Additionally – holding cash instead of property could have an impact on the benefits you’re allowed, including pension credit and universal credit.
Is downsizing a better option?
There’s no denying it – downsizing it is a mammoth task. However if you are able to sell and move to a smaller home, you could hold on to more of your money than if you opt for equity release.
Selling your home is complicated and more expensive upfront. But if you can find somewhere smaller, and perhaps more suitable for you as you get older, you could live off the extra income you’ve made from selling a larger home.
It’s likely the value of your home has increased since you bought it, and the money raised from a sale would prove higher than that you’d get from an equity release product.
A smaller home could also mean cheaper upkeep and lower bills, which would also save you money in the longer term.
However you do have to consider the costs of selling your home. These include energy performance certificates, estate agent fees, solicitor fees, removal costs and moving costs as well as capital gains tax.
The high cost of equity release over time is one reason why equity-release plans tend to come a long way down the list of options that financial advisers suggest to older people looking to boost their income. Downsizing, if you’re prepared for the upheaval, is likely to preserve significantly more of your wealth.
The upheaval experienced by the property market in the final quarter of 2022, caused by the mini-budget, “created a different landscape” in the equity release market, says Will Hale, CEO at Key.
“Higher interest rates, lower LTVs and fewer products available, has meant that advisers have understandably adopted a prudent approach when helping customers consider their options.”
But equity release products still helped people repay over £3.3bn of secured and unsecured debt. “Accompanied by appropriate specialist advice, this type of refinancing can be suitable for certain customers who may be struggling to meet their outgoings during the current cost of living crisis,” says Hale.
“For some customers, engaging with debt management charities, accessing alternative later life lending products, downsizing or working longer may be the answer to their financial challenges,” Key continues.
Seeking advice from a financial adviser is more important than ever as the market landscape continues to change.
“It is particularly critical in this market that advice is highly personalised and that potential vulnerabilities are identified and taken into account through the process,” says Key.
“Equity release can only be accessed with the support of a specialist broker and with the customer having received independent legal advice. As we move through 2023 we expect more and more people to choose to start that conversation and therefore take the first step towards finding a suitable solution for their individual circumstances now and in the future.”
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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