aAn increasing number of elderly people are considering indulging the stored value in their homes to help tackle the cost of living crisis in the UK.
Some want cash to upgrade a boiler or install solar panels for more cost-effective power, according to stock editors like Samantha Bickford at Clarity Wealth Management. Others wonder how they can help family members struggling with high prices.
The most common equity release deals are mortgage-based products which are loans that are secured against your home. Usually, there are no monthly payments – the loan, including cumulative interest, is paid off from the sale of the property when you die or go into long-term care. These are known as life mortgages.
Bickford recently helped a couple obtain a lifetime mortgage on their property to release cash to pay off their daughter’s home loan because high interest rates meant she was unable to return the mortgage.
“If homeowners cannot heat their homes or buy a warm meal because of their fear of a cost-of-living crunch, using money tied up in their property may offer a solution to a problem they cannot otherwise solve,” Pickford said.
Over the past year, more people have been considering using equity in housing to help their families, says Stephen Lowe of retirement specialist Just Group.
“Often this is to help them move up the housing ladder or move to a larger property but we are starting to see the resilience of families’ balance sheets under pressure, and parents are exploring how they can help their children and grandchildren,” he said.
Years of home price growth mean that millions of seniors have seen their property values skyrocket.
The equity issuance is available to those over 55 and allows homeowners to borrow a lump sum or regular small amounts against the value of their home from specialized lenders, without the need to oversell or undersell.
With many lifetime mortgages you can pay off their installments if you want to, and it’s probably a good idea to do so if you can.
Many view these products as a way to give family members their inheritance early, at a time when they need it most.
A record number of new stock release plans were issued between July and September — nearly 13,500 — with new customer numbers increasing by a third year on year, according to the stock issuance board’s trade body.
Total lending is up 40% since 2021, and the average person is now borrowing £133,770 (a lump sum for lifetime mortgages).
However, this growing appetite for equity release could hardly have come at a worse time when it comes to the price of new life mortgages, whose rates have reached “staggering” levels, according to Aaron Strutt of mortgage broker Trinity Financial.
Cost has always been one of the biggest downsides to launching stocks. With a life mortgage, the interest owed on the loan is usually added to the amount borrowed. You are then charged interest on that larger amount the following year, so the amount owed can grow rapidly.
With interest compounding over many years, sometimes over decades, the total amount owed may eventually cancel the property’s value by the time the borrower dies.
In October 2020, the average equity release loan rate was 4.01%, according to figures from Difqtou, while the lowest available rate was 2.23%. Now, the lowest rates available are at around 6.7%, while the highest are above 9%, according to a price check this week.
“To say that lifetime mortgage costs have increased dramatically would be an understatement,” Strat said.
“The main thing that makes the impact of higher lifetime mortgage rates so great is the cost of servicing the interest, and if it were to accumulate interest, the interest in real estate would erode more quickly.
“The amount borrowed will pretty much double after 10 years and will triple the amount in the 15th year.”
While life mortgages are touted as a solution to a lack of income during the cost of living crisis, Strutt says it’s crucial that borrowers fully understand the impact of this pooled interest.
“These products may remain the only option or the most appropriate route for some, but people need to enter into these transactions with a full understanding of the implications for current prices.”
Look for reliable, structured advice from a member of your stock editorial board.
There are countless terms and conditions, and it is imperative that you know exactly what you are getting into, and discuss the implications with your family.
Products offered by Equity Release Council member companies have a “No Negative Equity Guarantee,” meaning that your property will never owe more than your property value. There are also ways to cut costs.
Many deals allow you to pay off a portion of your loan principal, or interest, so the cost doesn’t accrue as much. While most loans have early repayment fees, some disappear after about 10 years, but it can be as little as five years, according to Will Hill, chief executive of Key, the UK’s largest lending advisor.
The most flexible deals are those with a feature called withdrawal, where you can get smaller amounts when you need it, with a reserve that you can call in if you need it in the future.
You will pay less this way because you only accrue interest on the money you have freed up.
Also consider portability: Can you take the loan with you to every type of property you might want to move into some day, including a retirement village, for example? Can you repay without penalty if your circumstances change?
“A good specialist advisor will talk to the client through all of their options including downsizing…While a stock issue will be right for some people, there is no one-size-fits-all answer and it is very important for people to think about what works for them now and on the the long term “.
For most people, the most financially efficient way to free up cash is to move to a smaller property or cheaper area.