A house provides a valuable source of capital, but the question is: When does one choose to release it? Figures recently released by the Equity Release Council suggest that for many homeowners in the UK, particularly those approaching retirement age, the best time is now.
What is an Equity Release Mortgage?
The usual way to release equity from your home is to sell it, but an equity release mortgage provides home owners with the means to access their capital without having to do that. They're targeted primarily at older homeowners who would otherwise lack sufficient income to make their payments, and there are two types: reversion schemes and lifetime mortgage.
Lifetime mortgage is the preferred type for most homeowners over the age of 55, as it enables them to take out a loan on the property in exchange for a lump sum. They keep ownership of the property and are not required to make monthly repayments. However, there is a 5% interest rate, which financial advisers warn can make the loan an expensive option in the long-term.
Largest equity release in years
According to Louise Eccles, a record £1.4 billion was loaned through equity release mortgages in 2014, which amounts to almost £4 million a day. Approximately 21,000 people released money from their homes over the course of the year, the highest number since 2008; and the equity release market grew by a third between 2013 and 2014.
What is the reason for this sudden rush to release equity?
A large proportion of homeowners cite concerns about their ability to support their current lifestyle on a limited pension income, especially when taking into account care home expenses. For many pensioners, the average £2,400 a month required to move into a care home proves to be a significant drain on their capital.
Others are more interested in providing for their children and grandchildren; such as by helping them to get on the property ladder themselves. They want to withdraw as much money as they can now while their family can make the most use of it, and while they can avoid the repercussions of inheritance tax.
And for still more people, their plans for the money are actually quite straightforward: Spend it. Whether it’s that dream vacation they always wanted, or some fancy new improvements to their home, it seems there is no long-term financial goal in mind, simply a desire to enjoy their new-found capital and indulge themselves with some luxury purchases.
Steve Wilkie of specialist firm Responsible Equity Release says that more retirees than ever are using equity in their homes to supplement their retirement income and to pay off mortgages and debts. However, they should be warned that while the loan does provide a good deal in the short-term, the interest rates could lead to it becoming double the amount over a period of ten years.
As such, anyone looking to take advantage of the equity release loan should ensure they are well advised on the potential implications. Don't hesitate to contact the experts at Tepilo for the best in professional advice pertaining to property investment and the property market in general.
Disclaimer The information and data provided are for general information purposes. They do not constitute investment advice nor can they take account of your own particular circumstances. If you require any advice on investments, you should contact a financial or other professional adviser.