Rising Living Costs Push 9 in 10 People Considering Equity Release

In a significant shift driven by the escalating cost of living, an overwhelming majority of Britons who are now considering equity release, are primarily doing it to manage their daily expenses, rather than for aspirational reasons. This trend marks a stark change from just two years ago, highlighting the deep impact of the current economic climate on household finances, Inews reports.

From Dreams to Needs: A Drastic Change in Motivation

Financial advisers across the country are observing this shift in the reasons behind equity release enquiries. Samuel Mather-Holgate, an independent financial adviser at Mather and Murray Financial, notes a dramatic change in motivations. Where previously clients sought equity release for helping family, savings enhancement, or luxury purchases, now 90% of enquiries stem from the need to alleviate the pressure of living costs.

Top reasons include paying off mortgages and clearing other debts, indicating a shift from aspiration to necessity in financial decision-making.

Understanding Equity Release

Equity release is a financial option for homeowners over 55, allowing them to unlock tax-free funds from their property. It’s particularly appealing to those with limited pension or savings, seeking to enhance their cash flow. The funds can be received as a lump sum or in installments.

Interestingly, the average amount taken as a lump sum has decreased from £133,770 last year to £94,806 in the second quarter of 2023, as per the Equity Release Council. This trend suggests a more cautious approach by borrowers in the current economic scenario.

The Balance of Necessity and Enjoyment

Simon Bridgland, a director at Release Freedom, highlights a mixed picture. About half of the borrowers have a pressing need, like mortgage repayments or essential home repairs, while 40% still pursue enjoyment, such as vacations or new cars. However, there are cases where Bridgland can’t assist due to the high borrowing needs of clients.

The Popularity of Lifetime Mortgages

A common form of equity release is the lifetime mortgage. It doesn’t require interest payments until the borrower dies or moves into residential care. More borrowers are now opting to pay interest regularly to control the accruing debt.

The primary use of these funds is often to pay off interest-only mortgages, which only require interest payments each month. At the end of the term, many find themselves unable to clear the final debt due to lack of funds, age, or insufficient income for traditional mortgage eligibility.

James Bull of JB Mortgages points out that equity release, requiring no income or affordability checks, is ideal in such scenarios.

Caution Advised Amid Rising Interest Rates

Despite being a helpful tool, equity release warrants careful consideration, especially with interest rates rising from an average of 3.86% in 2021 to around 6.6% currently. Rates are fixed at withdrawal and don’t change during the loan term.

For instance, a £70,000 loan at a 7% interest rate would balloon to £141,000 in debt after 10 years and £284,000 after 20 years. Most plans ensure that the debt never exceeds the property’s value, but this still requires thoughtful deliberation.

The Role of Property Wealth in Retirement Planning

David Burrowes, chair of the Equity Release Council, emphasizes the increasing likelihood of homeowners carrying mortgage debt into later life, especially in the current economic climate. With the average UK home containing £222,526 in equity, property wealth becomes an essential element in preventing a retirement crisis.

In summary, the surge in equity release enquiries, driven largely by the need to manage living costs, underscores the critical role of property wealth in contemporary retirement planning, albeit with a note of caution due to the rising interest rates.