The Financial Times recently reported that the amount of equity being released by UK homeowners had hit a record high in July, with an average of £78,334 being drawn.
Figures provided by Responsible Equity Release showed the average was up 10% from the month prior, and represented an unprecedented 158% year-on-year increase. Trends for the month varied by region; the North-East was a hotspot, with both the total amount of equity drawn and the average equity per homeowner up. In London, the total amount of equity drawn increased by 17%, but this was spread over an increased number of homeowners compared to the previous month, lowering the average equity release from £208,500 to £175,744.
Equity Release provides a means for older homeowners to access funds tied up in the value of their property. The most common type of Equity Release scheme – the Lifetime Mortgage – enables homeowners over a certain age (usually 55 or 60) to take out a loan secured against their property. Unlike a standard mortgage, no monthly repayments are required; the amount borrowed and the interest accumulated on the debt are paid back from the sale of the property typically when the homeowner dies or moves into a care home. Lifetime mortgages can vary quite a bit between providers – some allow a number of smaller equity releases to be drawn down over time, rather than in a single lump sum. Some providers also allow the homeowner to repay some or all of the interest during the life of the loan, rather than on the sale of the property.
The other type of Equity Release scheme, Home Reversion, involves selling a percentage of your property (from 25% to 100%) to the provider – at a price under market value – in exchange for a lump sum, regular income or a combination of both. You can continue to live in your home without paying any mortgage repayments or rent, and the home reversion provider is paid the corresponding percentage of the proceeds from the sale of the property after you die.
Both types of Equity Release have the advantage of providing a tax-free lump sum or income on which you do not have to repay any of the loan or interest during your lifetime whilst you own the property. There are no real restrictions on what you can do with the funds you receive from an equity release. In recent years, many homeowners have been using Equity Release to supplement their pensions or other forms of income, or to prop up their savings. Others use the schemes to pay off interest-only mortgages for which they might not have had a corresponding repayment vehicle, or where the repayment vehicles (for example endowment policies, stocks and shares ISAs or other investments) have underperformed and will not pay out enough to repay the outstanding mortgage balance at the end of the agreed term.
However, not all equity releases are taken out of necessity because a pension or other scheme is not providing the money it should later in life. In fact, many homeowner use Equity Release to fund home improvements. This can take many forms, such as renovating or upgrading a kitchen or bathroom, or even funding a small conservatory or loft conversion. Equity Release for home improvements may also be an option for homeowners who are disabled or infirm and need adaptations to manage more easily at home.
Equity Release can be a positive way to access funds from the value of your home and make things a bit easier in later years. However, it is not right for everyone; the cost of Equity Release schemes is typically high compared with other types of mortgage lending, and while the payment is tax free it could affect your entitlement to means-tested benefits.