With one in five baby-boomers now a millionaire, there is a perception that the later life generation is cash rich. Factors such as final salary pension schemes have undoubtedly helped inflate this age group’s wealth but a key driver has been the UK property price boom, meaning a large proportion of baby-boomers’ wealth is tied up in their homes.
Retirement is now lasting much longer, bringing with it the potential of higher care costs in later life. Figures published earlier this year show the lifetime mortgage market hit almost £4bn in 2018. Not only this, but the fact the average house price in Britain has risen a massive 270 per cent in the past two decades means there is also greater pressure on the ‘Bank of Mum and Dad’ to help younger relatives get on the property ladder.
With this extra pressure on hard-earned retirement savings, unlocking tied-up capital from a home is becoming an increasingly popular financial tool. Figures published by the Equity Release Council (of which we are a member) earlier this year show the lifetime mortgage market hit almost £4bn in 2018 – up nearly 30 per cent on the previous year. The sector saw 46,000 new customers in 2018 – a rise of a quarter on 2017 – with 12,891 new equity release plans agreed just in the final three months of last year.
Life expectancy has been on the rise until very recently. Official figures from the Office for National Statistics show life expectancy for men hit 79.2 years in 2015 to 2017 (the latest data available) and 82.9 years for women, up from around 71 and 77 respectively just since 1980 to 1982.
This means many people will now be living longer in retirement, which means their savings will have to go further. Property wealth can provide an alternative source of income to meet the costs of modern day retirement. A lifetime mortgage could be an option for many retirees, not just those struggling to fund their day-to-day expenses on their retirement income. You might might be able to afford their monthly expenses but also want to free up some extra cash for home improvements or a new car. Others could need an extra injection of cash to fund a life goal, such as the trip of a lifetime.
Lifetime Mortgages - A Definition
A lifetime mortgage is a loan secured against a your home and is a type of equity release that can provide a cash lump sum or a regular income over a fixed term.
The loan is only repaid once the property is sold due to the death of the last surviving policyholder or they are moved out of the home and into long-term care. It is worth noting if a couple take out a mortgage and one person goes into care but the other one remains in the home, then the mortgage will continue. Interest is charged on the loan plus any interest already added, which means the amount a client could owe upon taking out such a product can increase quickly over time.
While lifetime mortgages may not be suitable for every client, those who take the policies on can be assured two common myths are untrue. Firstly, as long as the customer meets the terms and conditions, they will never be ‘kicked out’ of their home. Unlike a conventional mortgage, lifetime mortgages are based on the value of the customer’s home and because with many mortgages the loan is not paid back until the customer moves into long-term care or dies, the customer is unable to default on the loan.
Secondly, all equity release plans approved by the Equity Release Council will benefit from the no negative equity guarantee safeguard. This ensures that a borrower or their estate will never owe more than the value of their home. There is also a misconception that the unlocked equity can only be taken as a cash lump sum, making lifetime mortgages inflexible products. In fact clients can opt to receive a regular income or smaller amounts, as and when they need.