Cash-poor homeowners should beware of equity-release

Struggling savers should think twice before using equity release schemes to tap their homes for money.

Equity-release specialists report a surge in demand from homeowners in their sixties forced to stop work earlier than expected or concerned about the impact of Covid-19 on their finances. More people than ever before are turning to their homes to bolster their income. For the cash-strapped, equity release has never looked more appealing. Not only have house prices hit record highs, but interest rates are also historically low. The most competitive equity-release plans now carry annual rates of less than 2.5%.

But even at these lower rates, the cost of equity-release plans builds up over time, potentially leaving borrowers with little or no property wealth to pass on to children. The younger the borrower when they take out the equity-release plan, the higher the costs are likely to be.

Plan providers usually require homeowners to be at least 55 before they will lend to them.
In the past, however, the average borrower has typically been significantly older – often in their seventies – which makes the product more affordable.

This reflects the nature of the product. Most equity-release plans are mortgages secured against your home, but with no repayments due while you remain in the property. Instead, interest rolls up over time and is repayable, along with the capital borrowed, when you finally move out of the property, or on your death.

How the payments spiral

This structure appeals to homeowners who need to convert the capital in their homes into income. The mortgage can be drawn down over time or invested to generate an income – without having to worry about repayments. But with interest charges subject to additional interest, the total amount owed can spiral rapidly.

A 75-year-old homeowner releasing £60,000 of capital from a home worth £300,000 would owe around £77,000 by age 85, assuming an interest rate of 2.5% on the plan. Someone taking out the same plan at age 65 would owe almost £99,000 by the time they reached age 85.

However, today’s equity-release plans are more flexible. For example, drawing down cash as you need it, rather than in one lump sum, can keep costs down as you only pay interest on the money you have taken out of the scheme. You may also have the option of paying interest charges as you go along, cutting the total cost.

Still, financial advisers describe equity-release plans as a last resort for older people worried about their income. For many people, it may make more sense to downsize, freeing up cash by moving to a smaller property. It is crucial to take high-quality independent financial advice before opting for an equity-release plan.

Recommended

The Federal Reserve wants markets to fall – here’s what that means for investors
Stockmarkets

The Federal Reserve wants markets to fall – here’s what that means for investors

The Federal Reserve’s primary mandate is to keep inflation down, and lower asset prices help with that. So, asks Dominic Frisby – just how low will st…
25 May 2022
Flexible working: don't rush your staff back the office
Small business

Flexible working: don't rush your staff back the office

The government is urging people to get back to the office. But there are good reasons for many small businesses to embrace flexible working.
25 May 2022
Let’s adjust to living with Covid and get Britain back to work
UK Economy

Let’s adjust to living with Covid and get Britain back to work

The Covid-19 era is over, leaving a stagnant and lethargic workforce in its wake. It’s time to wake up, says Matthew Lynn.
25 May 2022
Should you be worried about energy windfall tax proposals?
Energy

Should you be worried about energy windfall tax proposals?

Calls have been growing for a windfall tax on UK oil and gas producers. It's a popular idea, but is it a good one? And what does it mean for investors…
24 May 2022

Most Popular

Everything is collapsing at once – here’s what to do about it
Investment strategy

Everything is collapsing at once – here’s what to do about it

Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect th…
23 May 2022
Imperial Brands has an 8.3% yield – but what’s the catch?
Share tips

Imperial Brands has an 8.3% yield – but what’s the catch?

Tobacco company Imperial Brands boasts an impressive dividend yield, and the shares look cheap. But investors should beware, says Rupert Hargreaves. H…
20 May 2022
Three high-quality FTSE 100 shares going cheap
Share tips

Three high-quality FTSE 100 shares going cheap

As stockmarkets continue to fall, bargains are starting to appear, says Rupert Hargreaves. Here, he picks three high-quality FTSE 100 shares that are …
23 May 2022