A record number of homeowners are plundering the value of their homes to help pay rising household bills.
Capital release’s popularity is skyrocketing as millions of households struggle to meet day-to-day costs such as energy, food and fuel bills. Legal & General, one of the UK’s largest capital-released lenders, says 25% of homeowners who take out loans do so to supplement their day-to-day income, up from 19% last year.
Another lender, Canada Life, says the proportion of capital-released borrowers taking out loans for this reason has more than doubled from last year.
Safe as houses: Equity release popularity soars as millions of households struggle to meet day-to-day expenses
Equity release has grown in popularity in recent years as homeowners take advantage of the rising value of their property.
Traditionally, these loans – also known as life mortgages – have been used to finance major purchases, such as home improvements, one-time vacations, or to help younger family members pay for school fees or security deposits.
However, soaring household bills mean thousands of people are now using the loans just to get by. Jim Boyd, chief executive of industry trade body Equity Release Council, said: “No area of personal finance in the country will be spared from the current economic pressures in the UK.
“Equity release products are frequently used to supplement retirement income and fund one-time expenses, so more people may consider these options in a climate where prices are rising faster than incomes and where Unforeseen costs can create big headaches.”
Craig Brown, managing director of Legal & General Home Finance, adds: “As the cost of living crisis intensifies, we are seeing more and more homeowners using their home equity to supplement their shrinking incomes, bolster their bank balances to help create a safety net and, if donated, extend that safety net to their loved ones as well.
How Equity Release Works
Mortgages with capital release are similar to conventional mortgages. However, they are only accessible to owners over the age of 55.
Unlike standard mortgages, where interest and principal must be repaid each month, principal release mortgages increase interest. This means that repayments do not need to be made until the property is sold, usually after the owner dies or moves into a care facility.
However, the interest due is compounded, making it a considerably more expensive means of borrowing than a conventional loan.
It is gaining popularity
A total of £4.8billion was extracted from UK homes last year, according to the Equity Release Council. The number of new plans increased by 26% between April and June over one year.
Andrew Thirkill, founder and chairman of the UK’s largest stock release broker, Age Partnership, said the company was receiving 50% more inquiries than at the same time last year and that they were at the highest level since he founded the company in 2004.
“After years of steady house price growth, many people are sitting on a large chunk of their home equity at the same time as they see spending pressures hit them, prompting them to consider making wider use of it,” he says.
Taking out a capital release mortgage is a big decision and not for everyone. It is essential to first seek independent legal and financial advice from a member of the Equity Release Council.
Of course, it’s also worth talking to your family before you get started. Debt can grow significantly over the years, which could significantly eat into the value of your estate and the amount your beneficiaries will inherit upon your death.
Experts also caution against buying a product that will last a lifetime just to cover what could be a temporary cost-of-living squeeze.
There are alternative options that should be considered first.
For example, look at your budget and see where you could save money. Check that you are claiming all the benefits that are due to you. Go to gov.uk/benefits-calculators.
If you are struggling with debt, you can get free advice and help from organizations such as Citizens Advice, Money Helper, National Debtline and StepChange.
You may also consider using other funds to supplement your income. For example, a short- or medium-term loan may be a better option for one-time purchases, and using savings or pensions may make more sense financially.
Downsizing is also a popular way to pay off an existing mortgage or free up capital without taking out another mortgage. Supplementing income with a tenant may also be an option.
I borrowed to help make ends meet
Former betting shop owner Mike Barnes, 65, took out a capital-released mortgage earlier this year as he struggled with his bills.
“The interest rates on my savings were pretty good and I expected that to continue, but they’ve been so low for so long and my pensions haven’t worked out as expected,” says Mike, who lives near Blackpool in Lancashire.
“I lived off my savings and sold stocks and various jobs to make ends meet, but I could see my capital dwindling.”
Mike noticed things were getting a lot tighter and decided to go for an equity release.
“I have a five-bedroom, single-family house with no mortgage and four adult children, so the biggest asset I have is my house,” he says.
Age Partnership valued the house at £300,000 and Mike took out a £90,000 equity release mortgage, taking down an initial amount of £25,000.
An avid golf fan, Mike plans to downsize later and could then pay off the loan or move to a new property, whichever suits him financially best.
“I was aware that I was not planning enough money for the future, but I knew that option was always there. Otherwise, I would have had a hard time,” he adds.
Offers have improved
For years, the equity release was seen as the less reputable end of the mortgage market, with people tied to expensive loans that quickly snowballed into a sum much larger than the amount originally borrowed.
But tighter regulation, greater competition and more flexibility mean products have improved dramatically. However, borrowers can still be stung by early exit fees if they wish to repay the loan. Also, capital release proceeds cannot always be easily transferred to new property if the borrower moves, such as to a retirement complex.
The Financial Conduct Authority reviews the stock release market to ensure that consumers are being properly advised. Advice includes considering a potential borrower’s full financial situation and all alternatives, and allowing plenty of time for careful thought and discussion with loved ones.
How much do they cost
Interest rates were as low as 2.5% last year, but have since risen. The average rate in August was 5.74%, according to the Equity Release Council and rate tracker Moneyfacts.
Rates are likely to rise further as the Bank of England raises the base rate – the benchmark from which other rates are set – to deal with soaring inflation.
A capital release loan of £25,000 at the current average rate would climb to £41,185 in just ten years. This assumes that the borrower pools the interest in the loan and does not repay it. By comparison, a conventional loan of the same amount, with 5% interest, would cost £31,657 over ten years, in fixed monthly installments.
The Mail on Sunday has produced The Complete Guide To Equity Release, written by personal finance editor Jeff Prestridge. To request your free copy, call 0808 239 5293 or visit mailfinance. co.uk/unlockcash.
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