The range of equity release product options has more than doubled year on year, according to a report last year by the Equity Release Council. An increasing number of products enable customers to make ad-hoc, penalty-free voluntary repayments if they want to, so they can keep the impact of equity release interest rates to a minimum.
Current equity release interest rates remain low
As well as there being more flexible options available, the average interest rates on equity release remain low. In March 2020, the lowest available rate dropped to just 2.55pc, with recent research from Defaqto showing that over the 18 months to January 2020 the average interest rate offered to customers aged 65 fell from 5.4pc to 4.55pc. Interest rates can be affected by a customer’s age, the amount being borrowed, product features selected and certain health conditions, so it is important to obtain expert, personal advice to ensure you get the right plan and rate for you.
One of the key points to remember is that with equity release, interest rolls up and is compounded, which means the amount that interest is charged on increases with time. There are no required payments to make and the mortgage, plus interest, is usually paid out of the proceeds of your estate when your house is sold, either after you pass away or enter permanent long-term care. If you are concerned about the build-up of interest and its impact on your estate, then it may be worth considering a plan that allows you to make voluntary payments to reduce the size of the loan.
Apart from equity release interest rates remaining low, many products now offer a range of other flexible features. For example, almost two-fifths of equity release products now offer inheritance protection, which enables customers to ring-fence part of their housing wealth as a guaranteed minimum amount to pass on to beneficiaries, regardless of the total interest that builds up over time. Over half of the products now offer downsizing protection, which means if you take out a product but subsequently decide to downsize, you can repay what you owe without penalty.
Equity release moves from ‘niche to mainstream’
According to The Equity Release Council, the last decade saw exceptional levels of growth in equity release lending with a total of £3.92bn released in 2019.
The Equity Release Council said that total lending had increased for a seventh consecutive year to reach £3.94bn in 2018.
Separate figures from equity release provider Responsible Life showed that homeowners released on average £76,252 from their properties in 2019.
Record numbers of UK homeowners are releasing equity and it has been calculated that someone released equity from their home every 12 minutes in Q1 2019*.
Steve Wilkie, managing director of Responsible Life, said: “The equity release market had a strong but steady start to 2019, and the range of people with specific requirements that can now benefit has seen equity release products move from niche to mainstream.
“We’re still seeing plenty of enquiries from people who took out interest-only mortgages on their homes which are coming to an end and they are struggling to remortgage. But we talk to just as many retirees who are keen to have an equity release drawdown facility so that they don’t have to take money out of their pensions while stock market volatility is so high. The home has become a viable income source, filling the retirement income gap left by poor performing savings accounts.”
Flexible repayment options
With some lifetime mortgages, you can make interest payments, just as you do with an interest-only mortgage. There are a few ways in which you can make these payments. If you would like to make a disciplined, regular monthly payment, there are plans whereby you make either full or partial payments towards the interest. If you decide that you no longer want to pay the interest, you can stop making repayments and the product will switch to a regular lifetime mortgage where interest rolls up instead. As payments are not required, there is no risk of defaulting on these interest payments.
Drawdown lifetime mortgages
The other main type of equity release scheme is a drawdown lifetime mortgage, which as the name suggests allows you to release money down in stages. This can help reduce your overall interest costs as you are only charged interest on the funds you have actually taken.
Lower costs and greater flexibility offered by many equity release providers have meant that older homeowners are releasing record sums from their homes, either to cover retirement costs, fund home improvements or buy a second home.
According to research conducted by Responsible Life, 21% of over-55s who have used equity release have done so to provide financial help to their children.
Steve Wilkie, managing director at Responsible Life, said: “Our customers welcome the joy of giving an early inheritance to their children. Rather than wait to pass it on through a will, they can see how it’s spent, enjoy watching it being spent, but also exercise a degree of control so that they know it’s put to good use.”
“Life has changed with people living longer. Many of our customers have grandchildren and great-grandchildren, and want to pass on their wealth to all of their family members at different times in their lives. Gifting an inheritance this way can be strategically timed, for example when your grandchildren are about to go to university or embark on vocational training. ”
Always seek professional independent financial advice if you are considering equity release. An independent adviser will be able to research the whole market to recommend the right equity release plan for your needs, whereas if you speak to a company which sells its own plans it will only offer you advice on its own products.
Remember, you can speak to an equity release adviser without any commitment to signing up to an equity release plan, and an initial chat about the options shouldn’t cost you anything.
You should also bear in mind that receiving a cash lump sum from an equity release plan will reduce the value of your estate and the amount you will be able to pass on to your dependents. Your entitlement to means-tested benefits and tax position could also be affected, which is why it is so important to understand exactly how this type of scheme works before signing up.
*Data source: Equity Release Council Autumn Market Report 2019
Use our equity release calculator to see how much wealth you could release from your home and join the thousands of other British homeowners enjoying a more comfortable and happy retirement.
The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.
The Telegraph Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,490.
By consolidating your debts into a mortgage, you may be required to pay more over the entire term than you would with your existing debt.
Information correct at date of publication.