Equity release demand is being driven by necessity rather than aspiration, say financial advisers, as the rising cost of living has meant more people need to take money from their home to meet their living costs.
Brokers and financial advisers say the reasons behind taking out equity release are changing. When interest rates were at rock bottom two years ago, most people enquiring about equity release wanted to help children, boost their savings or fund a luxury purchase, says Samuel Mather-Holgate, an independent financial adviser at Mather and Murray Financial.
Now, 90 per cent of enquiries are due to the cost of living squeezing expenditure and clients looking for ways to reduce their outgoings or increase their disposal income. “Paying off mortgages is top, with clearing other debts a close second,” he adds.
Equity release allows homeowners over the age of 55 to unlock money from their home. It can be taken as a tax-free lump sum, or in instalments, and is particularly popular among people with limited pension or other savings who want to boost their cash flow.
The average equity release customer took £94,806 as a cash lump sum in the second quarter of 2023, according to figures from industry body the Equity Release Council. This is down from £133,770 a year earlier, suggesting borrowers are being more cautious about the money they take.
“I’m finding roughly 50 per cent of borrowers have an element of necessity, such as paying a mortgage lender or needing to do vital repairs to the home, 10 per cent are for purchases and 40 per cent still have an element of enjoyment to it – holidays, a new car or gifting – so it’s not all doom and gloom. That said, I get many enquiries from people I simply cannot help because the amount they need to borrow is too high,” says Simon Bridgland, a director at Kent-based financial advice firm Release Freedom.
Equity release is most commonly in the form of a lifetime mortgage, where the interest on the loan doesn’t have to be paid until you die or move into residential care. However, increasingly, borrowers are choosing to make interest payments on an ad-hoc or regular basis to keep the interest until control and to stop it spiralling.
The most common reason for taking out equity release is to pay off an interest-only mortgage, say advisers. An interest-only mortgage allows homeowners to just make interest payments each month, rather than making capital repayments.
Those above the age of 55 may find that when they reach the end of the mortgage term and need to clear their final debt, they do not have the cash to pay off the outstanding loan.
They are also not able to secure a traditional mortgage because they may be deemed too old, or are retired and don’t have a high enough income to pass affordability checks from a lender.
“Equity release is ideal for these clients as there are no income or affordability checks,” adds James Bull, a mortgage broker at West Yorkshire-based JB Mortgages.
Nevertheless, equity release should only be taken out after serious consideration and after taking advice from a trusted adviser. Interest rates on equity release have surged from an average of 3.86 per cent in 2021 to around 6.6 per cent today.
Interest rates on equity release plans are fixed at the point of withdrawal and do not change during the loan term, so there is no chance of the rate increasing or decreasing. Borrowing £70,000 with an interest rate of 7 per cent would mean around £141,000 is owed after 10 years and £284,000 would be owed after 20 years. Many plans offer a guarantee that the total amount owed will never be above the value of your property, to allay any fears of owing more than the property is worth.
Even before the current cycle of rising interest rates, many homeowners were facing the reality of carrying mortgage debt into later life, says David Burrowes, chair of the Equity Release Council.
“That is even more likely now. The average UK home contains equity of £222,526. Property wealth will remain a vital part of the equation to avoid a cost of retirement crisis”.
