Cash tapped from homes via equity release has risen by almost a third compared to this time last year, reaching record highs.
The value of new equity released from homes rose by 31.7 per cent to £2.56billion in the first half of this year compared to the same period in 2021, according to data from equity release adviser, Key Later Life Finance.
The average customer released just over £100,000 in property wealth, it said.
Cashing in: The average amount that older homeowners released from their homes in the first six months of this year was £100,468, which is more than £5,000 higher than in 2021
Sales of equity release plans were also up by 24.5 per cent this year compared to last year.
It means the equity release market is heading towards £6billion of new lending by the end of 2022.
Equity release unlocks the value built up in someone’s home, allowing them to access it in the form of tax-free cash.
It can only be used by homeowners over the age of 55, and they commonly use the money to boost their retirement income, fund home improvements or gift to family.
Rising house prices, the increasing cost of living and fear of increasing interest rates have all encouraged more people towards equity release.
Key’s data revealed a rise in the number of customers using property wealth for discretionary spending, but debt repayment was the major use of the money released.
As much as 57 per cent of customers used some or all of the property wealth to repay debt, compared with 53 per cent last year.
The average amount released in the first six months of this year was £100,468, according to Key Later Life Finance, which is more than £5,000 higher than in 2021.
With average equity release interest rates at 3.65 per cent, these are still lower than typical rates recorded three-years ago – despite five Bank of England base rate increases in recent months. The average rate three years ago was 3.92 per cent.
Although interest rates are starting to rise, the changes are nothing like as dramatic as is being seen in the mainstream mortgage market.
Average equity release rates are up by 0.63 percentage points on the 3.02 per cent recorded this time last year, and up by 0.46 percentage points on the same time in 2020, according to Key.
Similar to those wishing to remortgage their home in the traditional mortgage market, it is also possible to switch an equity release product to another deal and lender in order to get a better rate.
>> Check the latest equity release interest rates using This is Money and Age Partnership+’s new tool
It appears that many equity release customers have been rushing to take advantage of the competitive deals whilst they still exist.
There has been a 79 per cent year-on-year rise in the number of people remortgaging their deals from 2,130 in the first half of last year to 3,817 in the first half of this year.
Accounting nearly a fifth of all equity released in the first half of 2021, customers chose to remortgage an average of £130, 808 from an initial rate of 5 per cent to 4.2 per cent, saving potentially over £16,000 in interest over a ten year period.
What else are people using equity release for?
People choose equity release for all sorts of reasons – to clear debts, to help younger family members onto the property ladder, to make home improvements, or even just to head off into the sunset for the trip of a lifetime.
It can also help people withdraw cash from their own home without being at the mercy of the checks and balances required for a typical mortgage.
However, the interest can accumulate to large sums on many plans, especially if the borrower lives for a long time, so borrowers must take financial advice before embarking on equity release.
Some homeowners are using equity release for home improvements and repairs.
The proportion of people spending some of their equity release funds on holidays rose from 6 per cent to 12 per cent in the first six months of this year compared to last year – although it still only accounted for 1 per cent of the amount released.
Customers were also found to be increasingly using equity release for home improvements and repairs.
However, with the cost of living crisis at the forefront of peoples minds, the amount actually spent also remained flat at 7 per cent of the amount released.
Will Hale, chief executive at Key, said: ‘As an industry, the first half of the year has seen the market return to growth as we work to develop and grow to better serve over-55s homeowners.
‘With the cost-of-living crisis very much at the forefront of people’s minds, we’ve seen a continue focus on the management of both secured and unsecured debt – although the proportion of people who include some discretionary spending has increased.’
How does equity release work?
Equity release loans, also known as Lifetime Mortgages and Home Reversion Plans, allow homeowners to get a loan secured on their home, worth up to 60 per cent of its value, while still remaining the sole owner. They can use the money for anything they like.
If they still have a mortgage on their home when they take out the equity release loan, they must use the loan to pay off their mortgage in full.
Lifetime mortgages are the most popular type of equity release product, and are available to homeowners who are aged 55 or over.
Homeowners can opt for a drawdown lifetime mortgage or a lump sum lifetime mortgage.
Drawdown equity release mortgages allow you to take cash out of your home as and when you need, rather than in a single lump sum.
Lump sum equity release mortgages allow you to access all of the cash from your home in one go.
Equity release allows homeowners to avoid having to make monthly payments, unless they choose to, as the entire balance can be repaid when the home is sold.
If you choose to make no interest repayments the unpaid interest is added to the loan, meaning the size of the loan will increase over time.
Alternatively, you can opt for products which allow you to pay the interest each month. There are also products that allow you to pay off both the interest and the loan amount each month.
The decision to release cash from your home should never be taken lightly.
There will typically be a set-up cost, whilst interest on the loan will roll up and need repaying when the property is sold. The longer someone lives, the more interest will accrue.
It is a requirement to get financial advice before going ahead as you need to be certain that you’ll have enough money in retirement.
There may also be a better option. For example, selling up and downsizing to a smaller property may free up cash without any interest payments or charges attached.