Equity release 1-0-1
Homeowners released over £1bn in equity from their homes last year, the largest amount since before the financial crisis. And with more and more homeowners expected to tap into the funds tied up in their property in the coming months, Head of Equity Release Richard Espley takes some time out to explain how and why homeowners are returning to the equity release market:
“As more people enter retirement with outstanding mortgages, poorer pension provisions and depleted savings, it is not surprising that people are turning to their homes to help bail them out of this financial cul-de-sac. But if you’re considering equity release it’s important that you fully understand both the financial and legal implications before you commit.
“So let’s start at the beginning – what is equity release? Well it’s a bit like those Ronseal adverts – it does what it says on the tin. Equity release allows a homeowner to release some of the equity, or value, of their property whilst retaining the right to live there.
“Equity release plans are commonly known as ‘Lifetime Mortgages’ as, unlike a standard mortgage, there is no set term; it lasts for the rest of the homeowner’s life. In most cases, the rate also remains fixed for the life of the loan. So instead of paying off some of the capital each month, the interest accrues. The total amount is then payable when the homeowner either passes away or earlier if they decide to sell their home. A specialist equity release financial adviser can help explain the potential cost of a plan. It is also advisable to discuss your plans with family members as it is likely to have an impact on their inheritance.
“So why are so many taking out an equity release plan? Well I touched on one of the most common current reasons earlier – to pay off their remaining mortgage. This is particularly relevant for homeowners with insufficient funds to repay their existing interest-only mortgage.
“But there are many other reasons why retirees turn to equity release from topping up their retirement income to paying for home improvements. Some even do so as part of inheritance tax planning and we are seeing a growing number use the value of their property to help children and grandchildren raise a deposit to buy a property of their own. In fact this is now the third most commonly cited reason behind a homeowner’s decision to release equity.
“It’s more than fair to say that equity release has come a long way since its 80’s launch. Previously unregulated and with variable rising interest rates, equity release plans did little to help struggling retirees. In fact, in some instances, homeowners found themselves plunged further into debt.
“Thankfully things are very different now and equity release no longer faces being put into Room 101. The sector is properly regulated and additional safeguards prevent homeowners from falling into negative equity. There has also been genuine innovation in the type of products now available, all of which has contributed to a record breaking 2013.
“But as with any kind of financial commitment it is important that you consult with the professionals and enter into things with your eyes open.”
Content correct at time of publication