Equity release has grown in popularity recently as a financial solution for those approaching retirement, offering older homeowners the opportunity to unlock the wealth tied up in their property without the stress and emotions of selling the family home. Designed for those over the age of 55, these financial products are aimed at individuals who own their property and can be great solution to improving your lifestyle or meeting your financial needs as the cash released in this way is yours to be spent as you wish – whether that means day-to-day expenses, helping the grandkids on to the property ladder or in education, or perhaps treating yourself to a holiday or home improvement.
Public awareness of equity release is growing, so much so that last year the sector expanded at record levels. In fact, by 2020 industry experts have predicted that equity release lending reach £5 billion a year, if not more.
Innovative new products, increased funding and new lenders entering the market has also resulted in greater competition, which is creating more attractive deals for consumers. Our industry trade body – the Equity Release Council – last year celebrated its 25th anniversary and has been the cornerstone of ensuring fairness and equality in our industry by keeping what is best for consumers constantly in mind, when every decision is made.
Forms of equity release
A lifetime mortgage is the most popular form of equity release, whereby you effectively borrow money secured against the value of your house. There is no immediate interest paid on the loan, but rather when these plans finish, either upon sale of the property, or when you or your partner die, the interest rolls up and is usually paid along with the outstanding loan. In recent years, interest rates on lifetime mortgages have fallen dramatically, contributing to the increase in their appeal.
“Drawdown” mortgages are the most popular form of lifetime mortgage, and can help you prepare for unforeseen future spending. Their additional flexibility allows for a pot of money to be set aside from which cash can be withdrawn as and when it is needed, rather than taking out a lump sum. The remaining funds are left in a reserve facility with the lender, and interest is only applied to the money as it is taken out.
Factors influencing the size of the market
As some over 65s face the prospect of paying off their interest-only mortgages, consumer demand for equity release products has expanded. With this trend set to continue over the coming decade, considerable opportunities for lending in later life will open themselves up from which the equity release industry is set to benefit.
There has also been a recent transformation of the retirement planning industry following the introduction of pensions freedoms in 2015. With over 55s now having full control of their pension funds, property wealth is increasingly viewed as a valuable source of income when planning for retirement.
Rising house prices have allowed many homeowners to amass considerable equity over their lifetime, resulting in a growing number of retirees relying on property as their greatest asset. A report by Saga Investment Services[1] estimated that the over 50s owned 70 per cent of all housing wealth in 2013, indicating there may be huge potential for individuals to tap into their property wealth to transform their finances in later life. Research from Key Retirement has recently highlighted that the combined property wealth of over-65s has hit a new record of £1.072 trillion.
The UK population is undergoing a major transition as people in the UK are living longer than ever before, while social and cultural changes have meant that people are entering the property market much later. Government forecasts estimate that by 2037 there will be 1.42 million more households headed by someone aged 85 or over[2]; the mortgage market will certainly need to adapt in order to satisfy this demographic shift.
Equity release has the potential for positive societal impact. With an ageing population, releasing equity could help more elderly people afford support in their own home and delay the need of relying on the state. The current generation of over 50s is also far more likely than those in the past to expect to carry debt into retirement. According to research by more2life, one in ten of over-55s will still have a mortgage or overdraft and over half of 35 -54 year olds expect to owe more than £10,000 upon entering retirement. Equity release offers a means of reducing those unpaid bills.
Equity release also enables older homeowners to release money for their children or grandchildren to help with deposits, creating opportunities for younger first-time buyers to get onto the property ladder.
Inheritance benefits
While there are other methods of reducing your inheritance bill, equity release schemes may be able to protect you against future inheritance concerns. Equity release products on offer from lenders such as more 2 life have a well-established feature that guarantees you against negative equity. In other words, you can be reassured that your relatives will not be left with any ongoing debt. As the loan plus any interest can never be higher than the value of your home, even if the actual value of your home falls. Modern lifetime mortgages also offer a new security feature: the ‘inheritance protection guarantee’. Consumers can choose to protect a fixed percentage of the property value, which will remain on the eventual sale of the property. Plus, should you choose to pass on your newly released cash to your beneficiaries, and provided you live for at least seven more years, this financial gift will be tax-free. Although, when considering this option, it is important to attain expert advice on taxation regulation as this can vary per individual circumstances and can be subject to change.
The growing availability of equity release interest-only lifetime mortgage schemes has provided more homeowners the option to repay some or all of the interest every month. Having the facility to manage the total balance of the mortgage is likely to increase your chances of leaving behind some inheritance for your family.
Importance of obtaining specialist advice
If you think equity release could be a suitable option for your retirement plans, it is essential to seek financial as well as legal advice before entering into an agreement.
Products are sold through independent financial advisers who have gained specialist qualifications in this area and can help you thoroughly research the market. With 96[3] equity release deals on the market to choose from, according to financial data analyst Moneyfacts, advisers will make sure you choose the most suitable plan for you.
It is important that your advisor is on the Financial Conduct Authority Register, to ensure they abide by the guidelines set in place by the UK regulator. Likewise, the Equity Release Council implements valuable controls that have helped govern the UK market for the past 25 years. These standards have contributed to helping equity release gain mainstream recognition, by providing security and reassurance for consumers. If your independent financial adviser doesn’t feel comfortable advising you on equity release it is likely and right that they will pass on your case to an intermediary that specialises in equity release.
Summary
With a potential customer base sitting on huge housing wealth, it’s no wonder that in 2016 equity release was the fastest growing sector in the mortgage industry. According to the Equity Release Council’s Spring Report the volume of lifetime mortgage plans grew by 22% in 2016.
As a result of this market growth, consumers are now able to choose from a wide-range of plans as companies continue to develop and modernize their selection of equity release products. With an increasing reliance on property wealth as part of retirement planning and changing demographics in the UK, the growing demand from consumers means lenders are going to need to stay competitive in the market, helping equity release become a viable and affordable option for you.
Whether equity release sounds like the solution to your financial concerns, or you’re simply seeking greater comfort in retirement, you could be in a position to benefit from the value of your home. If you are over the age of 55 and sitting on an interest only mortgage that is about to mature or want to find a way of raising funds without moving home, speak to an independent financial adviser and find out if equity release is the solution for you.
