Equity release funds £3bn of spending as over-55s cash in on homes

Cashing in on their home’s value funded £3billion of spending by over-55s last year, as they used the money to top-up their income and cover day-to-day costs.

It is estimated that last year, one in every £90 spent by retired people domestically was a result of equity release, according to new figures from Legal & General and the Centre for Economics and Business Research.

As the cost of living crisis puts more pressure on pension pots the trend towards equity release, where owners can borrow against their home’s value, looks set to continue.

Market analysis by mortgage broker, Henry Dannell, shows that UK homeowners have already released equity to the tune of £1.4billion so far in 2022, with this figure estimated to hit almost £5.6billion by the end of the year.

 Demand for later in life loans is increasing as the cost of living crisis puts pressure on pension pots.

During the first three months of this year, over 12,500 homeowners opted for a later life mortgages – a 21.4 per cent increase on the first quarter of 2021.

Equity release loans, also known as later in life mortgages, unlock the value built up in a home, allowing them to access it as tax-free cash. 

They allow homeowners aged 55 and over 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.

The loan and interest accrued is then repaid through the sale of the property when the last surviving borrower dies or go into long-term care.

However, as the interest accumulates it can become a substantial part of a home’s value and so some deals offer the ability to pay off interest to protect inheritances.

While the majority of the cash released, £1.9billion, has been used to pay for occasional big purchases such as home improvements, furniture or even a new car, a significant amount, £1.3billion, is being used to cover the cost of day-to-day expenses including food, clothes and transport.

The remaining equity, around £480million, is expected to be spent on international holidays and financial planning.

Maintaining living standards in retirement (16 per cent) and paying off personal debt (16 per cent), are also cited as reasons for turning to the release.

Retirees are turning to later in life mortgages to pay for everything from home improvements and holidays to day-to-day expenses including groceries and clothes.

 Retirees are turning to later in life mortgages to pay for everything from home improvements and holidays to day-to-day expenses including groceries and clothes.

Craig Brown, chief executive of Legal & General Home Finance, said: ‘Our report highlights that homeowners are increasingly planning to use equity release or other ways of accessing property wealth to help fund later life. 

‘This shift reflects the boom in property values, which have made our homes such an important asset, but it also demonstrates how far the equity release market has come through the introduction of product innovations and how it has become a more suitable solution for a wider range of people.’

In total the growing later life lending market in the UK is worth up to £153.9billion, according to AKG Financial Analytics. 

This includes standard, retirement interest-only or equity release mortgages for borrowers over the age of 55.

Furthermore, around 50 per cent of advisers have seen an increase in demand for advice on later life lending in the past year and 58 per cent expect a rise in demand over the next 12 months.

Geoff Garrett, director of Henry Dannell commented: ‘Later life mortgages have continued to grow in popularity amongst the nation’s homeowners, many of whom are now making the most of the considerable increase in value that their property has yielded over the last two years.

‘For some, it’s become a safety net to overcome the rising cost of living, but we’re also seeing this increased activity being driven by those at the top end of the market, who may not be facing the same financial struggles as the average homeowner.

Equity release: How it works and advice

To help readers considering equity release, This is Money has partnered with Age Partnership+, independent advisers who specialise in retirement mortgages and equity release. 

Age Partnership+ compares deals across the whole of the market and their advisers can help you work out whether equity release is right for you – or whether there are better options, such as downsizing. 

Age Partnership+ advisers can also see if those with existing equity release deals can save money by switching. 

You can compare equity release rates and work out how much you could potentially borrow with This is Money’s new calculator powered by broker Age Partnership+.* 

 * Partner link

This is down to a number of factors – greater product choice and flexibility means that later life mortgages are no longer the rigid, complex instrument that they were and a competitive lending market has also helped to drive down the cost of drawing equity from a property.’

However, equity release products are not without their drawbacks.

The debt held against your house increases through the accrued interest and can add up to a significant proportion of the overall value of the property. And while the loan and interest can be paid off on death, the repayment will reduce the value of an inheritance. 

Some equity release products do offer the option to pay off the interest as you go. 

Or you can take out a series of smaller lifetime mortgages over the years. This way you will not be paying interest on the total sum for the whole period of time, so you will end up owing less.

It is also import to note that once you take out an equity release loan you are unlikely to be able to use your home as security for any other borrowing. 

And there is an argument that your money is better off left invested in your home than sitting as cash in your bank account. Furthermore, the cash released through later in life mortgages may impact you eligibility to claim means-tested benefits such as pension credit or council tax credit. 

Currently 5 per cent of homeowners use equity release to fund retirement, but this is expected to almost double to 10 per cent based on the anticipated plans of younger homeowners.

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