Equity release is often touted as an option for older people who are asset rich and cash poor, as it allows homeowners to free up some of the value tied up in their home to use as they wish. And as those reaching retirement age continue to live longer than previous generations there are many reasons why they might need this capital. David Burrowes, chairman of the Equity Release Council, the industry body for the sector, says: “Equity release allows homeowners aged 55 and over to withdraw wealth tied up in their property without having to sell up or move house."
By using an equity release product, a homeowner can draw a lump sum or regular smaller sums from the value of their home, while continuing to live in it. “Customers also have the option of ring-fencing some equity to retain some of the value of their property as a guaranteed minimum inheritance," adds Mr Burrowes.
There are two main types of equity release products: lifetime mortgages and home reversion plans. Older homeowners often consider equity release because they have insufficient income to live on in retirement but have lots of equity tied up in their home. “Other motivations might be releasing equity to help children or grandchildren get onto the housing ladder,” says Jonathan Harris, director of mortgage broker Anderson Harris. “Or it may be to raise funds to help with improvements or modifications to the property, take holidays or enjoy life.”
The equity release market has worked hard to improve its reputation in recent years and has seen huge growth as a result. Rachel Springall, finance expert at Moneyfacts.co.uk, says the market has expanded fivefold over the past five years and there are now more than 200 lifetime equity release deals available on the market.
“And the market has grown by more than 50 per cent since a year ago, when there were 131 deals available,” she says.
Mainstream lenders are either returning to or entering the market. For example, in March this year, Standard Life partnered with Age Partnership to start offering equity release products again, while Nationwide has become the first high-street lender to offer later life mortgage products, including a lifetime mortgage.
Counting the costs
But this surge in popularity does not necessarily mean that equity release is suitable for you, so if you are considering either of the product options you need to be aware of the disadvantages and associated costs.
“The interest on lifetime mortgages is rolled up or compounded over the duration of the loan, which means the debt will increase the longer it is maintained,” explains Ms Springall. “Property prices can fall as well as rise, so borrowers need to feel confident that they can pay the loan back at the end of their lifetime or by selling their home."
Opting for equity release could also affect your eligibility for various state and means-tested benefits, and incurs costs including professional advice fees for a qualified equity release adviser, legal fees and lifetime mortgage provider fees. However, Jonathan Birkett, mortgage, equity release and protection adviser at PK Group, says that “many providers offer low-cost options and/or allow you to add any fees to the initial borrowing".
The Financial Ombudsman Service (FOS) has not received many complaints about this type of later life product and says that “most people receive suitable advice about releasing equity”. However, its website lists some of the complaints it has received, including from relatives of people who have gone into care or died, and have since found out that significant amounts of money need to be paid back. “Some feel their relatives were vulnerable and talked into equity release,” states the FOS.
Equity release customers are usually encouraged to speak to their family before taking out a product such as a lifetime mortgage. Involving other family members in financial planning discussions, particularly if it affects their inheritance, may help older homeowners to come to a decision about the best way to access any cash they need and ensure that the right people are kept informed.
“Retirement planning and inheritance tax (IHT) planning are complex, so mistakes are easy, often irreversible and sometimes terribly expensive,” says Andrew Pennie, marketing director at Intelligent Pensions. “To avoid the many pitfalls, I would always recommend taking professional financial advice to ensure you are making the most of the available opportunities.”
Although equity release is often marketed as a way for those in later life to access some capital without the hassle of moving out of their family home, there are other avenues to explore. Downsizing may also be a more appealing option as maintaining a large home can become a burden.
“Downsizing could be the right option and could provide a comfortable home that is more suited to life as you get older and, ultimately, free up some capital as well, which may help you all round,” says David Hollingworth, associate director, communications at L&C Mortgages.
Mr Pennie thinks it is an “obvious alternative and perhaps sensible if you are rattling around in a very large property or would benefit from some kind of residential or nursing care”.
But those in their later years may not relish the prospect of leaving a home that has been in the family for a long time or an area they know well, and moving house at any age can be stressful.
“Many elderly people are reluctant to leave the family home and my experience of downsizing has seen family members selling large houses only to spend more or less the same on a smaller home,” says Mr Pennie. “If somebody desperately wants to stay in the family home, another option could be for the family to finance the need for capital or income. If they are to be the ultimate beneficiaries of the estate, they may prefer to lend the money the homeowner needs, rather than allow the estate to shrink due to the costs of an equity release scheme.”
Moving to a smaller property involves a number of costs so “it rarely frees up the amount of capital people expect it to, because you have to factor in everything from estate agency fees to stamp duty and removals", warns Sarah Coles, personal finance analyst at Hargreaves Lansdown. “And if you move into a popular kind of property in a desirable area, you may end up with a much smaller price differential than you were expecting.
Spotlight on pensions
If the size or location of the property is not an issue, and you are just looking to fund your retirement or to pay off an outstanding debt, then it might be a good idea to turn to your pension. The pension freedoms introduced by former Conservative chancellor George Osborne in 2015 mean that retirees are no longer required to cash in their pensions for an annuity. Instead they have more flexibility over access to retirement savings.
“Pensions are extremely flexible, and can be drawn down to meet capital and income requirements very simply and quickly,” says Mr Pennie. “Most pensions allow you to take 25 per cent of their value as tax-free cash and this is not a one bite of the cherry opportunity. They can be drawn at any time to suit your needs. One of the main reasons to consider taking all your tax-free cash is if you have debts to clear. The remainder of your pension is subject to income tax, as and when you draw it.”
But you need to consider the implications of doing this. “Your pension needs to last throughout your retirement, and the more you dip into it while you are relatively young, the less you will have in the future,” cautions Ms Coles. “You also need to bear in mind that once you have dipped into your pension, it severely restricts how much you can pay into it each year too. So, if you are still building your savings it may not be a suitable approach.”
Older homeowners who are thinking about dipping into their pension to pass it on will not necessarily get an IHT benefit because it could be subject to this tax if they die within seven years of making the gift. But a pension can be passed on tax efficiently.
Keeping it RIO
An increasingly popular reason for releasing equity from the family home is to pass wealth on to children or grandchildren while the home owner is still alive, to help them on to the property ladder. “But if you want to pass on cash to family members, it may be worth looking into remortgaging with standard products if affordability allows, or a retirement interest-only (RIO) mortgage,” says Mr Harris.
After the financial crisis, lenders were reluctant to offer mortgages to those heading into old age, so began to reduce the maximum age for a mortgage term. But they have since had to change tack because so many people are living for another 30 or even 40 years into retirement.
RIOs are a relatively new mortgage product, developed by lenders to meet the growing needs of those who are living longer in retirement.
“They can be considered as standard interest-only residential mortgages whereby the lender offering the product has more flexible criteria relating to age, income assessment and future repayment of the mortgage," says Mr Birkett.
The interest on RIOs is paid on a monthly basis, meaning their cost is much lower than that of an equivalent repayment mortgage. “Typically the lender will allow an older maximum age at the end of the mortgage term, meaning applicants who are approaching retirement or retired can make an application, provided that they can demonstrate the mortgage interest is affordable throughout the term,” says Mr Birkett.
Nationwide’s RIO, for example, requires applicants to apply before their 85th birthday and to be in receipt of a pension. They can borrow for any number of reasons, such as debt consolidation, gifting, holidays and home improvements. Nationwide says the loan is usually repaid by selling the property after the borrower moves into long-term care or dies, and must be redeemed within 12 months of these events. But this product is only available to existing Nationwide mortgage members.
Another type of RIO – a hybrid option – bridges the gap between traditional residential mortgages and lifetime mortgages.
“The key difference is that they are set up with an indefinite term, with the mortgage being repaid on death or upon entry to long-term care,” says Mr Birkett. “However, unlike lifetime mortgages the interest needs to be paid on a monthly basis throughout the life of the mortgage, although there is the fall back option of the client reverting to interest roll-up.”
Paying the mortgage interest on a monthly basis stops the liability growing – as with a traditional lifetime mortgage. “This protects the equity in the property, meaning that there is potentially more capital to pass on to loved ones after your death when the property is sold,” explains Mr Birkett.
Affordability must be taken into consideration before committing to a more traditional mortgage product. “I think the crucial difference between equity release and standard mortgage products is affordability, and demonstrating adequate income to cover the mortgage payment, month in, month out,” says Mr Hollingworth. “Can the borrower demonstrate that affordability? Do they even want to be paying out a mortgage payment each month?”
Remortgaging is another way to free up some cash. “This can be a useful way to pay one-off costs, such as home maintenance, or to free up a lump sum for a family member, but clearly there will be an ongoing drain on your income while you are paying the money back,” explains Ms Coles.
Remortgaging is a slightly more complicated process for those in an older age bracket and it is likely to only suit those with a decent income in retirement. It is not a good option for those looking to boost their income.
“It is not as easy to remortgage once you are retired, but it is not impossible," adds Ms Coles. "More lenders will consider mortgages up to the age of 70, and some will offer them with terms until 85 or even 90. Affordability is based on your retirement income, so you need to have a high enough income to be considered. And the better your credit record, the more likely banks and building societies are to lend to you.”
But if paying off outstanding household debts or ongoing home improvements are your main concern it might be worth weighing up the benefits of a personal loan.
“Given that the rate on a personal loan tends to be higher than that on a mortgage, there may not be anything to gain from taking a loan to pay off your mortgage,” says Ms Coles. "But for the purposes of using it to pay for renovation work on your home, it is an option. Loans tend to have maximum age limits, so the older you are, the harder it may be to borrow, although there are lenders who will give you a loan in your 70s. Some lenders offer specialist secured loans for people aged 55 to 95, although these are secured against your home.”
To take out a personal loan you need to prove that you can afford this out of your retirement income.