The equity release industry is pleased with itself. According to Key Retirement Solutions, one of the market’s big players, it is “firmly established” back on a growth trend.
In 2011, 22,366 new plans were started and £959.6m in total was released from people’s homes. That’s big money. Fans of equity release (or lifetime mortgages) say this makes sense. The elderly often need money and rarely want to leave their homes. So if they can borrow against their house and leave the money to be repaid on their death, why not? But the truth is that equity release is an exceptionally expensive way for the retired to borrow money.
From a lender’s point of view, lending like this should be expensive. Why? Because it’s effectively subprime lending. The borrowers have no ability to repay the debt from income or from non-property assets, and you also have no idea when the debt will be serviced or repaid. So of course you charge high rates of interest. The problem is those who take out these loans often have no idea how pricey it is – simply because they don’t understand how fast compound interest mounts up.
Say you take out a £50,000 loan against your house when you are 70. You pay 6.5% interest (note you can get an ordinary ten-year repayment mortgage for just 3.9%). Then you live until you are 90. The debt, now consisting of the capital sum plus 20 years of interest on interest, will come to £176,182. That may not matter to anyone desperate to stay in their home and with no other funds or living relatives. But I think we can be sure it will matter to most other people.
Most of us who are able to would surely be better to downsize to a cheaper house: that way you get the lump sum of cash but without the ongoing horror of a compounding debt. Those who take this route will also be giving themselves another bonus. As you downsize you will also go through all your things and sort out the useless from the useful. You’ll be selling or distributing bits of furniture that won’t fit into your new house. And as you go you’ll also be making a mental inventory of your possessions.
That makes it the ideal time to add some specifics to your will: you can use the move to decide who is getting what, to write it down, and if needs be explain your decisions to your heirs.
Do all this and not only will your move make your life better (you’ll have a pile of cash and you’ll be organised), but you’ll be giving a gift to your children. They won’t have to clear and sell their childhood home or deal with the risk of falling out over a painting they all love that isn’t mentioned in your will. I think they’ll thank you for it.