Equity Release Surges in Popularity

Equity release is fast becoming the go to solution for a myriad of financial problems, from reducing IHT to simply paying off existing mortgages in retirement.

A surge in homeowners looking to free up cash from their properties propelled the figure for equity release to £1.05bn in the three months to the end of September, driven by high house prices, gifts to family members and uncertainty induced by the coronavirus pandemic.

The value of equity released jumped by nearly one-fifth from £884m in the third quarter of 2020. While the number of loans taken out was slightly down year on year, the average amount of housing wealth freed up was 23% higher, at £101,593 per borrower.

Data published this month by equity release provider Key suggested many borrowers were taking advantage of recent house price gains to help family members climb the housing ladder. “Big-ticket items” such as debt management and gifting were behind nearly two-thirds of the equity released in the third quarter, Key said.

More than two-fifths (42%) of the cash given to family and friends was used for house deposits. For homeowners over the age of 55, equity release offers a way of unlocking the value of their properties, whether for home improvements, paying off debts (including the existing mortgage) or to help family members.

Interest on the loan is paid through the sale of the house at the end of the term (or on death), so unlike a conventional mortgage a borrower is not required to demonstrate a minimum level of income to qualify.

Interest rates are higher for these “lifetime mortgages” than for most mainstream mortgages. Key said rates on equity release were still “significantly under those recorded historically” but had crept up from a low of 2.8% in the last quarter of 2020 to 3.16% in the latest three-month period.

Those who use equity release at a younger age risk accumulating a much higher interest bill when the moment comes to sell up, so people may be advised to hold off for as long as they can before taking out a loan. Key’s research found 49% of borrowers in the latest quarter were aged between 65 and 74.

I predict equity release will be the single biggest growth area in financial services over the next 10 years and beyond as millions of Generation X (41-54 years old) approach retirement. The average pension pot in the UK is just over £60,000.

If we take out Baby Boomers this almost halves. Many will get to retirement and their only asset will be their home. Equity release, far from being one possible solution may unfortunately be the only solution.