More British homeowners are opting for equity release, a report has found.
The Equity Release Council reported a 32% increase between the first quarter of 2024 and the same period this year.
It is the fourth successive quarter of growth recorded by this market.
David Forsdyke, head of later life finance at Knight Frank Finance, said: “Older homeowners are borrowing more to cover their cost of living, which has risen sharply in the past five years.
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“Many are asset-rich but cash-poor – they have plenty of equity in their homes but perhaps their pensions don’t stretch to cover their living expenses.
“Equity release offers a solution whereby they can draw down small amounts to top up their income. Others simply borrow to gift money to their children or grandchildren.”
Changes to inheritance tax announced by the government last year are also causing homeowners to change behaviour.
Last October, the chancellor said inherited pensions, which are currently not counted for inheritance tax purposes, will be included from April 2027. Farmers will also have significantly more inheritance tax liability.
“Among the fastest growing parts of the market is wealthy homeowners with sufficient levels of income but concerns about inheritance tax,” Forsdyke said.
“They are raising funds through equity release to move funds into more inheritance-tax efficient investments, perhaps through their beneficiaries.”
What is equity release?
Equity release refers to taking money out of your home without having to sell the property. You can take the money you release as a lump sum or in several smaller amounts.
There are two ways to do this:
- Lifetime mortgage: This is the most common type and is a long-term loan secured against the value of your property. You borrow a cash lump sum and then choose to make repayments – there is no requirement to pay it back monthly and you can just let the interest build up. The loan and the built-up interest must be paid back when the borrower dies or when they need to move into long-term care;
- Home reversion: You sell a part or all of your home to a provider in return for a lump sum or regular payments. You have the right to continue living in the property until you die and the reversion company then gets a share of the proceeds when your home is sold.
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To be eligible for equity release you must:
- Be at least 55;
- Own a home in the UK and it must be your main residence;
- Have to meet a minimum property value – usually it’s £75,000.
Last year, Money took an in-depth look at the pros and cons of equity release…
Pros
Richard Dana, founder and chief executive of the family mortgage specialist Tembo, said the big benefit of equity release was that it allowed you to remain in the home you want to live in for the rest of your life without any risk of it getting repossessed.
It also allows you to “get access to cash where there might not be any other options”.
“If people want to stay in their home but they want to repay an outstanding mortgage or they need some money for their retirement, they want to boost their retirement funds, that is the main benefit,” he said.
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Cons
But equity release comes with many pitfalls that need to be taken into consideration.
Dana said that while there is “a lot of regulation around it”, it is “really expensive – particularly now”.
“Unless you have to do it in the current environment, it’s very expensive and it means the value of your assets that you might leave to your loved ones is going to go down a lot more. So you are going to be paying a lot more interest than you would have been,” he said.
Dana said people must seek independent advice, speak with family and consider all options.
“Speak to not just an equity release broker but a mortgage broker – look at different options available to you. Depending on what you need the money for, you might be able to find alternative solutions, for example you can downsize.”
Caroline Fletcher-Shaw, equity release legal expert at Wilkin Chapman Solicitors, said that as well as reducing your estate, and therefore any inheritance you want to leave, it could also impact state benefits, as your income may be higher.
She said equity release “tends to have a higher interest rate than other products”.
