Record numbers of homeowners are plundering the value of their home to help pay rising household bills.
The popularity of equity release is soaring as millions of households struggle to keep up with everyday costs such as energy, food and fuel bills.
Legal & General, one of the UK’s largest equity release lenders, says that 25 per cent of homeowners who take out loans are doing so to supplement their day-to-day income, up from 19 per cent last year.
Another lender, Canada Life, says that the proportion of equity release borrowers taking out loans for this reason has more than doubled compared to last year.
Safe as houses: The popularity of equity release is soaring as millions of households struggle to keep up with everyday costs
Equity release has been growing in popularity in recent years, as homeowners cash in on the rising value of their property.
Traditionally, these loans – also known as lifetime mortgages – have been used to fund large purchases, such as home improvements, once-in-a-lifetime holidays or to help younger family members with school fees or house deposits.
However, soaring household bills mean that thousands are now using the loans just to get by. Jim Boyd, chief executive of the industry trade body, Equity Release Council, says: ‘No area of the nation’s personal finances will be unaffected by the UK’s current economic pressures.
‘Equity release products are frequently used to top up retirement income and fund one-off expenses, so it follows that more people may consider these options in a climate where prices are rising faster than incomes and where unexpected costs can create major headaches.’
Craig Brown, chief executive of Legal & General Home Finance, adds: ‘As the cost of living crisis intensifies, we are seeing more homeowners use property wealth to help boost their squeezed incomes, bolstering their bank balances to help create a safety net and, in the case of gifting, extend that safety net to their loved ones too.’
Equity release mortgages are similar to conventional ones. However, they can only be accessed by homeowners over the age of 55.
Unlike standard mortgages, where the interest and capital has to be paid off each month, equity release mortgages roll up the interest. This means repayments do not need to be made until the property is sold, usually after the owner dies or moves into residential care.
Interest owed compounds, though, making it a considerably more expensive way to borrow than a conventional loan.
A total of £4.8 billion was extracted from UK homes last year, according to the Equity Release Council. The number of new plans is up 26 per cent between April and June year on year.
Andrew Thirkill, founder and chairman of the UK’s largest equity release broker Age Partnership, says the company is receiving 50 per cent more enquiries than this time last year and they are at the highest level since he founded the company in 2004.
‘After years of sustained house price growth, many people are sitting on a lot of equity in their homes at the same time that they are seeing spending pressures coming at them full on, which is making them consider putting that to a wider use,’ he says.
Taking out an equity release mortgage is a big decision and not suitable for everyone. It is crucial to seek independent legal and financial advice from a member of the Equity Release Council first.
Of course, it is also worth speaking with your family before going ahead. The debt can grow substantially over the years, which could considerably eat into the value of your estate and the amount that your beneficiaries inherit when you pass away.
Experts also warn against taking out a product that will last a lifetime simply to cover what may be a temporary cost-of-living squeeze.
There are alternative options that should be considered first.
For example, look at your budget and see where you could make savings. Check that you are claiming all the benefits due to you. Go to gov.uk/benefits-calculators.
If you’re struggling with debt, you can get free advice and help from organisations such as Citizens Advice, Money Helper, National Debtline and StepChange.
You could also consider using other funds to top up your income. For example, a short or medium-term loan may be a better option for one-off purchases, and using savings or pensions may make more sense financially.
Downsizing, too, is a popular way to either pay off an existing mortgage or release capital without taking out another mortgage. Supplementing income with a lodger may also be an option.
Former betting shop owner Mike Barnes, 65, took out an equity release mortgage earlier this year when he was struggling with his bills.
‘The interest rates on my savings used to be quite good and I expected that to continue, but they’ve been so low for so long and my pensions didn’t perform as expected,’ says Mike, who lives near Blackpool in Lancashire.
‘I’ve been living off savings and selling some shares as well as doing various jobs to make ends meet, but I could see my capital diminishing.’
Mike noticed things getting much tighter, and decided to go for equity release.
‘I’ve got a five-bedroom detached home with no mortgage and four grown-up children, so the main asset I have is my house,’ he says.
Age Partnership valued the home at £300,000 and Mike took out a £90,000 equity release mortgage, drawing down an initial £25,000.
Keen golf fan Mike plans to downsize later and could pay off the loan then or move it to a new property, depending on what’s best for him financially.
‘I was aware I wasn’t making enough provision for the future, but knew that this option was always there. I would have struggled otherwise,’ he adds.
For years, equity release was seen as the less reputable end of the mortgage lending market, with people tied into expensive loans which rapidly snowballed into a much larger sum than the amount originally borrowed.
But tighter regulation, greater competition and more flexibility means products have improved considerably. However, borrowers may still be stung with early exit fees if they wish to pay off the loan. Furthermore, equity release products cannot always be easily shifted over to a new property if the borrower moves home, such as to a retirement complex.
The Financial Conduct Authority is looking at the equity release market to make sure that consumers are being properly advised. Advice includes considering a potential borrower’s full financial position and all alternatives, and to allow plenty of time for thoughtful consideration and discussion with loved ones.
Interest rates had fallen as low as 2.5 per cent last year, but have been rising since. The average rate in August was 5.74 per cent, according to the Equity Release Council and rates scrutineer Moneyfacts.
Rates are likely to rise higher still as the Bank of England raises the base rate – the benchmark from which other rates are set – to deal with soaring inflation.
An equity release loan of £25,000 at the current average rate would spiral to £41,185 in just ten years. This assumes that the borrower bundles up the interest into the loan and does not pay any off. By comparison, a conventional loan for the same amount, attracting five per cent interest, would cost £31,657 over ten years, in fixed monthly instalments.
The Mail on Sunday has produced The Complete Guide To Equity Release, written by Personal Finance Editor Jeff Prestridge. To request your free copy, call 0808 239 5293 or visit mailfinance. co.uk/unlockcash.
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