The equity release market is booming. Living longer but struggling to save for retirement or running short of money after taking too much out of pensions too early mean more people than ever want to cash in on the value of their house in later life. Equity-release plan providers lent £3.94bn last year, says the Equity Release Council, up 29% on 2017. The size of the market has doubled within a four-year period.
Equity release plans are deceptively simple. Over-55s can borrow against the value of their property – typically up to 50% – to generate a pot of cash. You can use this money as you like and there are no repayments due. The loan, plus interest, is repaid after your death from the proceeds of the sale of your house, or earlier if you need to sell to move into long-term care.
Equity release can be an attractive proposition for homeowners in need of cash and sitting on a valuable asset, particularly those who are unable or unwilling to free up capital by downsizing to a smaller property. However, there are some big downsides. In particular, equity release plans can prove very expensive.
In part this is because lenders’ rates are not as competitive as on standard mortgages, typically priced at 5%-6% a year, according to personal finance data provider Moneyfacts. But the key problem is that since you’re not making any repayments, the charges mount up, exposing you to the perils of compound interest. Borrow £50,000 at the age of 60 at rate of 5.1% and what you owe doubles roughly every 14 years.
So any inheritance you were hoping to leave to children can be wiped out. Equity Release Council members all guarantee no negative equity – your debt will never be greater than the value of your property – but your heirs may get nothing.
Loans become more flexible
However, increased competition in the sector has resulted in better deals, with a fivefold rise in the number of products on offer over the past five years. Rates have come down – you can now find fixed-rate deals below 4% – and products have become much more flexible. You’ll often have the choice of taking a monthly income rather than an upfront lump sum, which reduces the cost of the deal and suits people looking to supplement their income. You may be able to make voluntary capital or interest repayments during your lifetime.
Still, the cost of equity release means it should be a last resort for most people. If you do need to raise additional capital or income later in life, moving into a smaller property will typically be a more economic solution. You should take independent financial advice before signing up for a plan; reputable equity-release providers will often require you to do so. Seek an adviser with a specialist qualification in equity-release advice.