Imagine you’re retired. You own your house outright. And you have a pension too. That’s good. But there’s a problem. Your pension pays for your day-to-day living. But it doesn’t pay for much more. You’d like a new car, a few really great holidays and the ability to set up savings accounts for your grandchildren. But while you are rich on paper, you just haven’t got the cash.
You know you could solve the problem by downsizing or by selling to rent. But you’d rather not. You spent 40 years working to buy the house you now have. And you have long been picturing your retirement there – gardening and watching those grandchildren play. So what do you do?
There’s an obvious and seemingly simple answer. You do equity release in the form of a lifetime mortgage. You borrow money against the house at a set rate of interest and let it all roll up to be paid back out of the proceeds of the sale of the house on your death. You get the cash, you don’t have to move and, unless you decide to sell up, you never have to personally repay the debt.
Sounds great, doesn’t it? In theory it is – and in theory we thoroughly approve of it. But while a good many other people seem to like the idea too (£4.2m a day is currently being borrowed via equity release schemes), it doesn’t always work out quite as it should.
Why? Fees, charges and overly high interest rates. An equity release mortgage should be more or less risk-free. The borrowers can’t default – repayment is automatic on sale of the house – and as long as lenders don’t lend too much (they aren’t allowed to ask to be repaid more than the value of the house on sale), they can’t really lose.
Interest rates on them should be lower than those on other mortgages, not higher – but they aren’t. The best rates (on a loan-to-value ratio of only 40%) come in at a fixed rate of about 6% at the moment. The loans also tend to come with nasty repayment penalties. That’s tough if you end up deciding you want to move after all: last week’s Sunday Times ran a miserable story of a couple who borrowed £70,000 with equity release, decided to move six years later and found that the total compound interest (interest is charged on the interest every year) and charges on the cash came to £46,000.
This doesn’t mean you shouldn’t do it. If you want to stay in your house, you want some cash and aren’t too bothered about how much of the house’s value is left for your children, perhaps you should. But it does mean you should take good advice and think carefully about your options. Would downsizing really be so bad?