Increasing numbers of older borrowers are turning to equity release to clear debts and fund home renovations and it could be cheaper and more flexible than you think. Industry body the Equity Release Council (ERC) says the number of loans arranged has grown by 14 per cent over the past three years and advisers say the products have come a long way from the days of high fees and complex terms.
Here we debunk some of the more popular myths about equity release.
Equity release is expensive
Equity release lets older borrowers unlock tax-free cash from the value in their property.
Rates may be more expensive than a traditional mortgage but it is worth remembering that this product can only be used by borrowers from age 55 when it can be harder to access a standard home loan.
Additionally, pricing for equity release products has actually fallen to historic lows in recent months.
Figures from the ERC show the average rates for equity release products reached record lows of 4.11 per cent in July 2020, with more than half of products offering a rate of four per cent or lower, and a fifth offering rates below 3 per cent.
Industry data from Moneyfacts highlights just how far these rates have fallen, as five years ago average fixed rates of 6.12 per cent were not uncommon.
If you borrowed on a rate of 6.12 per cent, the debt would double almost every 12 years, however if you borrowed the same amount on the current average rate of 3.29 per cent it would take 22 years for the debt to double.
The rates may also work out cheaper and the product could be more efficient than alternative sources, such as a retirement interest only mortgage, depending what you are using the money for.
For example, the average cost of a residential care home in the UK in 2019, was £33,852 a year, according to Payingforcare.org, rising to £47,320 when nursing care was included.
This would need to be paid on a weekly or monthly basis but if you have requirements that can be met with in-home care you could instead use equity release to access cash locked up in your home.
The loan then only needs to be repaid once you move into care or by your estate once you pass away so you can avoid those upfront costs.
I could end up paying more than what the property is worth
When you take out an equity release product such as a lifetime mortgage the provider will value your property and typically lend you up to 60 per cent of its value, dependent on your age.
You can choose how much to actually drawdown and the loan only has to be repaid once you move into care or at death.
There is a risk that your home could fall in value which could mean the loan is worth more than your property.
But nowadays most providers, and all those who are members of the ERC, commit to a negative equity guarantee.
This means that when your home is sold, even if the amount left is not enough to repay the lender in full after agency and legal fees, neither you nor your estate would have to pay any more.
I won’t have control over my property
One of the main benefits of equity release is that in most cases you retain ownership of your property.
There are two types of equity release plans available.
Borrowers can get a home reversion plan where you sell all or a share of your property in exchange for a lump sum. It is important as you get older because it is where you have made your memories and is the place you probably feel most comfortable.
You can use equity release to access cash locked up in the value of your property and use it to adapt your own home to make renovations such as a walk-in bath, new kitchen or to add that internal hot tub!
I won’t have any inheritance to pass to my loved ones
Everyone wants to ensure their loved ones are looked after once they pass away.
Equity release is a debt so the money, plus accrued interest, would need to be repaid when the loan becomes due.
This may mean you have less to pass on but some lenders will let you ring-fence a fixed proportion of your property’s value that is guaranteed to pass on to your beneficiaries regardless of how much is owed on the loan.
The latest ERC figures show 14 per cent of the products currently available offer an inheritance guarantee so it’s important to check with your adviser if your plan has this.
Some plans offer different types of flexibility such as letting you make adhoc repayments or taking monthly income rather than a lump sum.
What can equity release be used for?
Equity release can be used for any reason.
It must first clear any outstanding mortgage and that is often the main reason borrowers take out the product.
It can be useful if you need to clear an interest-only loan that has come to an end especially if you don’t have enough savings and want to avoid having to sell your home to clear the debt.
Once you have cleared any outstanding mortgage the money is yours to spend as you wish.
An increasingly popular way the money is being used is for home improvements, whether that be a new kitchen or, with lender approval, that extension you’ve always dreamed of. Home improvements were the main reason for releasing equity among 25.5 per cent of customers during the third quarter of this year. Other popular reasons for releasing included gifting for loved ones and purchasing a new car.
If you are considering equity release, why not contact us for impartial, expert advice where we can tell you if equity release is right for you and help you find the right solution.