More than 40,000 people took out equity-release plans last year, cashing in on almost £4bn of value locked up in their homes. The figures, just published by the Equity Release Council, underline the ongoing popularity of equity-release plans with older people looking to supplement their income in retirement, or to find a cash sum for purposes such as paying off debt or a home refurbishment.
Financial advisers have traditionally been sceptical about equity release, pointing out that the plans are often expensive, and that they reduce the size of any inheritance left over for children. But while selling up and downsizing is still likely to be a more economic route to unlocking value from your home, assuming it is practical, fierce competition in the equity-release market is paying off for potential customers.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Beware compound interest
The problem with this model is that the laws of compound interest mean the debt incurred will roll up quickly. While equity-release providers typically guarantee that the mortgage debt will never rise above the value of your home, the amount to be repaid can balloon, with interest racking up on previous interest charges as well as on the capital borrowed. Once the loan is finally repaid, there may be little left over from the sale proceeds. Still, the good news is that interest rates on equity-release plans have never been lower. The market-leading deals now cost less than 2.5% a year. At that rate, a borrower taking out a £50,000 advance at age 65 would owe £64,184 by age 75 – and £93,352 by age 90. That’s quite a chunk of interest to be repaid, but an interest rate of 3.5% would result in a £119,791 debt for the same 90 year-old’s estate.
Monthly payments
Innovation in the equity-release market also offers comfort. Some providers allow you to pay interest charges as they come up each month, which keeps the size of the debt in check. Another option is to draw down money in chunks as you need it, rather than in one upfront sum. This will reduce the interest you owe. Alternatively, consider an equity-release plan that allows early repayment. This might appeal to homeowners who need cash now but expect to receive an inheritance of their own in a few years’ time.
The combination of reduced cost and greater flexibility means that equity release has become a more attractive option for older homeowners caught in the trap of being asset-rich but cash-poor. The plans still have downsides – and you should definitely take independent financial advice from a specialist in equity release before committing – but do not rule them out.
-
The most resilient ski resorts in the world – where is the best place for snow retention?Luxury ski resorts are thriving, with some destinations better positioned to weather the storm of warmer winters than others. We look at the most resilient locations for snow
-
Clubrooms by No1 Lounges review: A luxury airport lounge for escaping the hustle and bustleMoneyWeek visits Clubrooms by No 1 Lounges, an airport lounge intended to elevate the pre-flight experience for passengers seeking privacy
-
Who is Jared Isaacman, SpaceX astronaut and Trump's pick as NASA chief?Jared Isaacman is a close ally of Elon Musk and the first non-professional astronaut to walk in space. Now, he is in charge of NASA
-
'Rachel Reeves’s tax rise will crash the economy'Opinion Rachel Reeves will be the first chancellor since Denis Healey in the 1970s to raise income tax. It will only push Britain into recession, says Matthew Lynn
-
Venture capital trusts that offer growth, income and tax reliefOpinion Alex Davies, founder of high-net-worth investment service Wealth Club, picks three venture capital trusts where he'd put his money
-
'How I brought MoneyWeek to the masses'Launching MoneyWeek gave ordinary investors information – and hence power, says Merryn Somerset Webb
-
'It’s time for Rachel Reeves to secure her legacy'Opinion Rachel Reeves has been a dreadful chancellor, and it's hard to see her remaining in office for another whole year. She could at least depart with some dignity
-
Klarna leads a financial revolution – should investors buy?Klarna has ambitions to rewire the global payments system and has huge growth potential
-
Are venture-capital trusts worth investing in?Venture-capital trusts are a tax-efficient way to invest in early-stage companies. But are they worth the risk?
-
Can Rachel Reeves save the City?Opinion Chancellor Rachel Reeves is mulling a tax cut, which would be welcome – but it’s nowhere near enough, says Matthew Lynn
