Equity release – or remortgaging your home – saw a surge in popularity at the end of 2024, latest figures have revealed.
The Equity Release Council says there was an increase in lending of £622million in the last quarter of the year, up 16% on the year before, although the figure for the total year fell from £2.6bilion to £2.3bn.
We can only guess at the reasons for the sudden ‘boom’, but economic uncertainty, the ‘cost of living crisis’ and fears for the future could all be fuelling the decision by older homeowners to borrow more money against their property.
Long time readers of this column will know we are not generally in favour of equity release as there are often better alternatives to achieve financial or life goals, but the lure can certainly be tempting.
In a nutshell, it allows over-55s to benefit from up to 58% of the money tied up in their home tax free, while they can continue to live there.
The money, plus accrued interest, only needs to be paid back when the property is sold after the last surviving homeowner dies, or if they go into long-term care.
The method is either a lifetime mortgage or home reversion plan, with the former the most popular.
Do remember though, unless you plan on making regular repayments – which seems unlikely in many cases as people want the money to ‘do extra things’, the compound interest will see the debt increase until it is much more than the amount borrowed.
So why do people choose equity release? According to figures from Age Partnership+, the biggest reason is home improvements. This may be to adapt the home to accommodate advancing age or to make it more energy efficient, or for that ‘dream project’.
Repaying the existing mortgage is the next popular reason, which may remove the burden of monthly repayments (unless you choose to pay off only the interest) but in the long run it will cost more.
Gifting to family and friends accounts for around 10% of equity release cases, perhaps to help a child get on the property ladder. This may be a suitable option for some, but very careful estate planning and inheritance issues need to be taken into account.
The next popular reason is for holidays of a lifetime or new cars! While for some these may be important, we urge people to look at it rationally and consider that their ‘new car’ will be relatively worthless and worth considerably less than the equity release debt when they do pass away.
Finally, some may choose to do it to provide additional income in later life.
All of these reasons need to be very, very carefully scrutinised and in our opinion, there are often better ways to realise these financial or life goals.
Anyone considering equity release should first discuss their financial options with an independent financial adviser such as ourselves – there may be alternatives such as drawing down on pensions, using savings, working longer or perhaps downsizing in property.
What are the ramifications for estate planning and what aspirations do they have to leave an inheritance?
Are the objectives things they NEED, or simply want? A personal loan would be a cheaper way to gain a holiday or new car, for example.
If current income is an issue, are they already receiving the benefits they are entitled to? If home improvements are essential, have they explored grant schemes to facilitate this?
The notion of equity release is seductive and panders to the want of getting something NOW, with tomorrow looking after itself, but there are many aspects you need to consider, including the complications it may bring down the line.
Please do have a full discussion with an adviser and explore your options fully before deciding if it is right for you and signing on that dotted line.
