Recent data from the Equity Release Council (ERC) has shown a significant shift in homeowner preferences towards more flexible equity release products. Despite a decrease in the overall use of equity release, there’s a trend among new customers choosing drawdown lifetime mortgages over traditional options. These mortgages allow multiple withdrawals rather than a single lump sum, providing greater control and flexibility over finances.
How Drawdown Lifetime Mortgages Work
A lifetime mortgage is the most popular form of equity release, which permits homeowners to borrow against the value of their home. The loan is typically repaid from the sale proceeds when the borrower either passes away or moves into long-term care. Unlike standard lifetime mortgages that distribute funds in one large sum, drawdown options enable you to withdraw smaller amounts over time as needed. This approach not only provides financial flexibility but also reduces the interest accrued since it’s only applied to the amount withdrawn.
Growing Popularity of Drawdown Plans
In the first quarter of 2024, drawdown lifetime mortgages attracted 56% of new customers—a significant increase from 45% in the second quarter of 2022. This rising popularity can be attributed to the cost-effectiveness of these plans. Since interest is only charged on the amount actually withdrawn, overall debt accumulation is minimised, reducing the compound interest effect. Moreover, the initial average withdrawal by new customers was £59,660 out of an average total of £114,911 approved, indicating a strategic financial management to potentially benefit from future interest rate cuts.
David Burrowes, Chair of the Equity Release Council, noted a decrease in overall equity release customer numbers, with a 31% drop compared to the same period last year. This decline reflects the cautious stance homeowners are adopting, likely influenced by economic uncertainties and potential future interest rate reductions.
Considerations Before Opting for Equity Release
While equity release might seem appealing, particularly for those without other borrowing options, it’s essential to understand that it’s a long-term commitment and can be costly. The amount you can borrow typically depends on your age and your property’s value, with maximum borrowing capped at around 60%. It’s critical for homeowners to consider their future financial needs and discuss with family, as equity release will reduce the inheritance left for loved ones.
The major downside is the compound interest effect, which can significantly increase the debt over time, potentially consuming the entire value of your property. Thus, it’s crucial to consider whether you can make voluntary repayments to mitigate this.
Seeking Expert Advice
Arranging for equity release requires advice from a qualified, regulated adviser. The Financial Conduct Authority mandates this to ensure homeowners make informed decisions. Advisers should ideally not be restricted to products from just one or two lenders and must hold qualifications like CeRER, CER, or the now-discontinued ERMAPC.