An a growing number of older people are considering tapping into the value stored in their homes to help cope with the UK’s cost of living crisis.
Some want cash to upgrade their boiler or install solar panels for more cost-effective energy, according to stock release advisers such as Samantha Bickford of Clarity Wealth Management. Others wonder how they can help family members struggling with rising prices.
The most common capital release agreements are mortgage products which are loans secured by your home. Typically, there are no monthly repayments – the loan, including accrued interest, is repaid from the sale of the property when you die or enter long-term care. These are known as life mortgages.
Bickford recently helped a couple take out a lifetime mortgage on their property to free up money to pay off their daughter’s home loan as rising interest rates made it impossible for them to re-mortgage.
“If homeowners can’t heat their homes or afford a hot meal due to their fear of a cost of living crisis, using the cash tied up in their property may offer a solution to a problem that ‘they couldn’t resolve otherwise,’ Bickford said.
Stephen Lowe, of retirement specialist firm Just Group, said that over the past year more and more people have considered using home equity to support their families.
“Often it’s to help them move up the housing ladder or move to a larger property, but we’ve started to see the resilience of household balance sheets under pressure, and parents are exploring how they could help their families. children and grandchildren,” he said. said.
Years of rising house prices mean that millions of older people have seen their properties increase sharply.
Capital release 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 specialist lenders, without having to sell or downsize.
With many lifetime mortgages, you can make payments if you want, and it’s probably a good idea to do so if you can.
These products are increasingly seen by many as a way to give family members their inheritance early, when they need it most.
A record number of new equity release plans were taken up between July and September – nearly 13,500 – with the number of new clients increasing by a third year on year, according to trade body Equity Release Council.
Total loans have increased by 40% since 2021, and the average person is now borrowing £133,770 (i.e. for lifetime lump sum mortgages).
However, this increased appetite for the release of equity could hardly have come at a worse time when it comes to the price of new lifetime mortgages, whose rates have reached “maddening” levels, according to Aaron Strutt of the brokerage in Trinity Financial mortgages.
One of the biggest drawbacks of equity release has always been the cost. With a lifetime mortgage, the interest due on the loan is usually added to the amount borrowed. You will then be charged interest on this larger amount the following year, so the amount owed can quickly increase.
With interest accumulating over many years, and sometimes decades, the total amount owed can eventually wipe out the value of a property upon the death of the borrower.
In October 2020, the average rate for a loan with capital release was 4.01%, according to figures from Defaqto, while the lowest rate available was 2.23%. Now the lowest rates available are around 6.7%, while the highest are above 9%, according to a price check this week.
“To say that lifetime mortgage costs have risen dramatically would be an understatement,” Strutt said.
“The key element that makes the impact of these higher lifetime mortgage rates so significant is the cost of servicing interest, and if compounded, interest capitalization will erode property equity faster.
“The amount borrowed will roughly double after 10 years and reach triple the amount in the 15th year.”
As lifetime mortgages are promoted as a solution to the lack of income during the cost of living crisis, Strutt says it’s crucial that borrowers fully understand the impact of this accrued interest.
“These products may still be the only option or most appropriate route for some, but people should enter these transactions with a full understanding of the implications of current rates.”
Seek trusted, regulated advice from a member of the Equity Release Council.
There are a myriad of terms and conditions, and it’s essential that you know exactly what you’re getting into and discuss the implications with your family.
Products offered by Equity Release Council member firms have a “negative no value guarantee”, which means your estate will never owe more than the value of your property. There are also ways to cut costs.
Many transactions allow you to pay off some of your loan principal, or interest, so the cost doesn’t add up as much. While most loans have prepayment charges, some disappear after around 10 years, but it can be as little as five, according to Will Hale, managing director of Key, the Kingdom’s largest end-of-life loan adviser. -United.
The most flexible plans are those that include a feature called direct debit, where you withdraw smaller amounts when needed, with a reserve to use if you need it in the future.
This way, you’ll pay less because you only accrue interest on the money you’ve unlocked.
Also think about portability: can you take the loan with you to all types of properties you might one day want to move to, including a retirement village, for example? Are you able to repay without penalty if your situation changes?
Hale says, “A good specialist adviser will talk to a client about all of their options, including downsizing…While freeing up equity is fine for some people, there is no one-size-fits-all answer and it is extremely important people think about what works for them now. and in the longer term. »
For most people, the most financially efficient way to free up cash will be to move to a smaller property or less expensive area.