Home Real Estate UK mortgages: could equity release help with rising costs? | Equity release

UK mortgages: could equity release help with rising costs? | Equity release

by Ozva Admin

AAn increasing number of older people are considering tapping into the value stored in their homes to help with the UK’s cost of living crisis.

Some want cash to upgrade their boiler or install solar panels for more cost-effective energy, according to capital release advisers like Samantha Bickford at Clarity Wealth Management. Others wonder how they can help family members struggling with rising prices.

The most common equity release deals are mortgage-based products that are loans secured against your home. There are usually no monthly payments: the loan, including accrued interest, is paid off with the sale of the property when you die or receive long-term care. These are known as lifetime mortgages.

Bickford recently helped a couple obtain a lifetime mortgage on their property to free up cash to pay off their daughter’s home loan because rising interest rates meant she couldn’t remortgage.

“If homeowners are unable to heat their homes or afford a hot meal due to fears of a cost-of-living crisis, then using the cash tied up in their property may offer a solution to a problem they might not otherwise be able to solve,” Bickford said.

Stephen Lowe of retirement specialist firm Just Group says that over the past year, more people have been considering using home equity to help their families.

“Often this is to help them move up the housing ladder or move to a larger property, but we’ve started to see the resilience of household balance sheets come under pressure, and parents are exploring how they could help their children and grandchildren,” he said. he said she.

Years of rising house prices mean that millions of seniors have seen their property values ​​rise sharply.

Equity release is available to those 55 and older and allows homeowners to borrow a lump sum or smaller regular amounts against the value of their home from specialized lenders, without having to sell more or downsize.

With many lifetime mortgages you can make payments if you want to, and it’s probably a good idea to do so if you can.

These products are increasingly seen by many as a way to give family members their inheritance ahead of time, at a time when they need it most.

A record number of new share release plans (nearly 13,500) took place between July and September and the number of new clients rose for the third year over year, according to trade body Equity Release Council.

A brightly colored cottage in a UK town with red walls and a blue door.
More people have been considering using fair housing to help their families. Photograph: Julian Eales/Alamy

Total borrowing is up 40% since 2021, with the average person now borrowing £133,770 (ie for lump-sum lifetime mortgages).

However, this heightened appetite to release capital could hardly have come at a worse time when it comes to the price of new lifetime mortgages, whose rates have reached “mind-boggling” levels, according to Aaron Strutt of mortgage broker Trinity Financial.

One of the biggest drawbacks to the stock release has always been the cost. With a lifetime mortgage, the interest due on the loan is usually added to the amount borrowed. You’ll then be charged interest on this larger amount the following year, so the amount you owe can add up quickly.

With interest compounded over many years and sometimes decades, the full amount owed can eventually wipe out the value of a property when the borrower dies.

In October 2020, the average rate for an equity release loan was 4.01%, according to figures from Defaqto, while the lowest rate available was 2.23%. Now the lowest rates available are around 6.7%, while the highest are above 9%, according to a price check this week.

“To say that lifetime mortgage costs have increased dramatically would be an understatement,” Strutt said.

House keys on a house-shaped keychain
It is crucial that borrowers fully understand the impact of a lifetime mortgage. Photograph: Eskay Lim/Getty Images/EyeEm

“The key thing that makes the impact of these higher lifetime mortgage rates so significant is the cost of servicing interest, and if it adds up, compounding interest will erode equity in properties faster.

“The amount borrowed will practically double after 10 years and will reach three times the amount in the fifteenth year.”

While lifetime mortgages are promoted as a solution to lack of income during the cost-of-living crisis, Strutt says it’s crucial that borrowers fully understand the impact of this accrued interest.

“These products may still be the only option or the most suitable route for some, but individuals should enter into these transactions with a full understanding of the current rate implications.”

Seek trusted and regulated advice from a member of the Equity Release Council.

There are myriad terms and conditions, and it’s essential that you know exactly what you’re getting into and discuss the implications with your family.

Products offered by member firms of the Equity Release Council have a “negative equity guarantee,” meaning your estate will never owe more than the value of your property. There are also ways to keep costs down.

Many offers allow you to pay part of the principal of your loan, or the interest, so the cost does not increase as much. While most loans have early repayment charges, some disappear after about 10 years, but it can be as few as five, according to Will Hale, chief executive of Key, the UK’s largest senior loan adviser.

The most flexible offers are those that include a feature called drawdown, where you take out smaller amounts when you need them, with a reserve to fall back on if you need it in the future.

You will pay less this way because you only accrue interest on the money you have released.

Also consider portability: can you take the loan with you to every type of property you want to move into one day, including a retirement villa, for example? Can you pay without penalty if your circumstances change?

Says Hale, “A good specialist advisor will talk to a client about all of their options, including downsizing…While releasing capital will be right for some people, there is no one-size-fits-all answer and it is vitally important that people consider what works for them now. longer term”.

For most people, the most financially effective way to free up cash will be to move to a smaller property or a cheaper area.

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