Equity Release – Over-55s forced to use house equity to pay off debts

Equity Release schemes include lifetime mortgages & home reversion

People asking for an equity release lump sum up front when they tap into the value of their home has risen sharply, indicating their pensions no longer support them.

Figures suggest that an increasing number of pensioners are having to cash in on the value of their homes so they can top up their income or pay off debts.

According to the Equity Release Council, Equity release lending, which lets over-55s access some of the value of their house, rose 32pc year-on-year to £326m representing its highest point since 2004.

The proportion loaned on equity release plans during the first half of the year rose to 41pc from 37pc. This suggests a rising number of borrowers who need funds immediately.

Soaring house prices are also playing a part. The average value of each loan has gone up more sharply than the number of new borrowers.

Nigel Waterson, chairman of the Equity Release Council, said “more and more people” were going into retirement with unpaid debts from their mortgages or credit cards.

He then went on to say that: “We know that there are huge numbers of people coming up to term on their mortgages, many of them with no plan to pay off the capital.”

“There is a whole generation for whom equity wealth is going to be larger than their pension pots. In some cases people are sitting on significant housing wealth yet can’t afford to eat or go on holiday.”

Equity release allows older people to unlock the accumulated wealth in their property without having to leave their home.  This usually involves taking out a loan which does not need to be repaid until death or the sale of the property.

Interest on the equity release loan repayments are usually higher than normal mortgages, and can potentially accumulate to consume the entire value of the property.

Costs can be reduced by ‘drawing down’ smaller loans individually as they are needed, and only paying interest on what has been borrowed.

Mr Waterson said that draw-down plans still make up most of the market, and that the most common reason for a lump sum loan is home improvements – whether that be a conservatory, hot tub, walk-in shower or a chairlift.

Pensions have taken a beating since the 2008 financial crisis, which wiped more than £400bn off the combined value of UK pensions equating to an average loss of £10,000 per person.

The quantitative easing combined with the historically low interest rates which resulted has been punishing for savers, with banks and building societies reducing the interest paid by almost £1bn since 2013.

In comparison, over £900bn of equity is tied up in owner occupied homes, according to Savills (housing consultancy firm), and an estimated 40pc of this is held by pensioners.

The average equity release loan rose 16pc to £61,734, while the number of equity release customers rose only 10pc. This indicates that rising house values influenced the figures.

Post courtesy of Telegraph.