3.3.1 Equity release
In this video, Martin Upton and Jonquil Lowe discuss the growing market in equity release products. They examine the social and economic reasons for the growth in business and whether the products are a good way to raise funds for later life.
There are essentially two types of equity release products.
Lifetime mortgages involve borrowing against the equity a homeowner holds on their property but without the need to make repayments. Interest on the borrowed funds is ‘rolled up’ with the original sum borrowed. On death, or the sale of the property, the lender recoups the initial sum borrowed and the rolled-up interest during the term of the loan. Lifetime mortgages can be taken out from the age of 55.
Home reversion plans involve the outright sale of a share in the property. So here the homeowner does not face interest being added on to the amount of money raised by the part-sale of their property. On the eventual disposal of the property, the lender takes the percentage share of the selling price agreed at the time that the home reversion plan was put in place. It is the share of the property value at the point of its sale that the lender recoups, rather than the sum paid for that share when the home reversion plan was put in place. Home reversion plans can only be taken out from the age of 65.
Equity release products are complex and have significant implications for families. No one should enter into such arrangements without seeking specialist financial advice and without discussing the matter with their families and other parties with an interest in the property involved.
In the light of the discussion between Martin and Jonquil in the previous section:
- Do you think equity release products are a good way of providing money in later life?
- Would you contemplate using such products yourself?
- What are the alternatives for households seeking additional resources in later life?
Equity release products are not the cheapest nor the most attractive means of raising funds. The rolling-up (or compounding) of interest with lifetime mortgages can significantly erode the equity held in a property. The amounts paid for a given share of a property under home reversion plans can be considerably below the market value of that share when the plan is taken out.
The earlier an equity release product is taken out by a homeowner, the greater these financial disadvantages tend to be.
Downsizing, delaying retirement or even taking in lodgers (up to £7500 of room rent per year is currently tax-free) may represent better ways of raising additional money in later life. For those without such options, equity release may be the only way to raise additional money in later life – but even in these circumstances, financial advice must be sought and the family consulted on such a material financial decision.