Early last month, City AM had a dramatic headline: ‘Cash-strapped homeowners turn their properties into personal cash machines.’
They reported that equity release was ‘booming’, with homeowners releasing a total of £4.8bn from their homes in 2021. Ten years previously, the amount released was just £790m with only two years out of the ten – 2019 and 2020 – showing any pause in the increase. One estimate quoted in the article suggested that by 2025 the annual amount released could pass £6.5bn.
Equity release – the name given to a variety of schemes allowing older homeowners to access some of the equity (or cash) tied up in their homes – has been around for a long time. Why then, is it suddenly so popular? And is it a good idea? Or a trap for the unwary?
Whatever happens to the pound and stock markets, property prices seem to keep going up. In September, the FT reported that house prices were up by an average 10% over the last 12 months.
Many homeowners, therefore, find themselves ‘property rich and cash poor’. They have a lot of equity tied up in their house – sometimes having bought it for a price far lower than the current valuation. But they don’t have enough income to live comfortably, or to enjoy some of the things they had always promised themselves in retirement. With the current levels of inflation, that is a problem which will only get worse.
Understandably, their thoughts turn to releasing some equity from the property. This isn’t the place to go into the various schemes available, but in its simplest form, equity release involves taking money from the equity in your home, which is repaid when you die or when the house is sold (for example, if you go into long term care).
So is it a good idea? The answer, of course, is ‘it depends’. It depends on your individual circumstances, including your overall financial planning goals and your state of health.
Equity release is complicated: nevertheless its growing popularity shows that it is the right solution for an increasing number of people. So why might you consider it? There are perhaps three main reasons:
- Your other savings and/or sources of income won’t be enough to meet your needs in retirement
- You don’t want to (or can’t) release cash by moving to a smaller property
- You understand – and accept – that the size of estate your beneficiaries ultimately inherit will be reduced (or, of course, you have no beneficiaries).
However, it may be sensible to consider an alternative to equity release for the following reasons:
- You can meet your needs in retirement, either from your income or from other sources
- You can release money by downsizing your property
- You’re determined to preserve as much of your estate as possible for your family to inherit
Either way it is a complex decision, involving both financial and family considerations. Disagreements in families over a decision to release equity from the parents’ home are not unknown.
It is an area of financial planning where the advice of a good, well-qualified and experienced firm of financial advisers is absolutely essential – both to help you decide whether equity release is the right solution, and then to advise you on the type of equity release which best suits your needs.
It goes without saying that any of our clients who have questions on the subject, or who’d like a preliminary chat, shouldn’t hesitate to contact us. Remember that we are never more than a phone call or an e-mail away.
Using equity in your home will affect the amount you are able to leave as an inheritance. Any means tested state benefits (both current and future) may be affected by any equity released. This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.