TODAY’S BLOG
EQUITY RELEASE SURGE
A surge in homeowners looking to free up cash from their properties propelled the figure for equity release to £1.05bn in the three months to the end of September, driven by high house prices, gifts to family members and uncertainty induced by the coronavirus pandemic. The value of equity released jumped by nearly one-fifth from £884m in the third quarter of 2020.
While the number of loans taken out was slightly down year on year, the average amount of housing wealth freed up was 23% higher, at £101,593 per borrower. Data published this month by one of the main equity release providers (Key) suggested many borrowers were taking advantage of recent house price gains to help family members climb the housing ladder. “Big-ticket items” such as debt management and gifting were behind nearly two-thirds of the equity released in the third quarter. More than two-fifths (42%) of the cash given to family and friends was used for house deposits.
For homeowners over the age of 55, equity release offers a way of unlocking the value of their properties, whether for home improvements, paying off other debts or to help family members. Interest on the loan is paid through the sale of the house at the end of the term, so unlike a conventional mortgage a borrower is not required to demonstrate a minimum level of income to qualify. Interest rates are higher for these “lifetime mortgages” than for most mainstream mortgages. Interest rates are low by historic terms, but equity release is a not straight-forward.
THE POWER OF COMPOUNDING INTEREST
Equity release is not like a normal mortgage, repaid over a set time. It is generally a loan which is only repaid when the property is sold. Overall, no payments are made, the interest merely compounds. By now you know the miracle of compounding interest – which works wonderfully for your investments and does precisely the opposite for your debt.
The risks you need to consider are future interest rates, the future value of your home and how long you will live or anyone else that you share it with. The earlier you release equity, the bigger your total debt in the end. Admittedly this helps reduce the value of an estate for inheritance tax, but in practice it can simply mean that there is nothing to inherit.
Some of you may remember the significant property crash in the late 1980s. At the time equity release was very popular and many people got caught out by the reduced value in their home and the increasing interest rates. All conspired to create genuine stress and financial hardship for some. There have been reforms, but I would urge caution – a lot of it. This should always be considered in the context of your total financial planning, not simply a desire to help a family member.
We do not provide advice about equity release but can refer you to a specialist. However, you should exercise great caution and have a clear plan and reason about why you want the funds. Interest rates are normally higher than a typical mortgage. The fact that around half of those using equity release are between 65 and 74 does not bode well for those that may live for 2 or 3 decades.
As ever, good financial management starts with good budgeting and a proper plan.
Dominic Thomas
Solomons IFA
You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk
GET IN TOUCH
Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT
Email – info@solomonsifa.co.uk
Call – 020 8542 8084
GET IN TOUCH
Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT
Email – info@solomonsifa.co.uk Call – 020 8542 8084