Why the Tide Is High for Equity Release Schemes
You may have heard various stories around the subject of equity release, but what do these mortgages for people over the age of 55 actually entail? Here we investigate what the fuss is all about & reasons the volume of equity release lending is dramatically rising & breaking all records
What is Equity Release?
Equity release is the generic term for any homeowner who wishes to convert equity in their property into tax-free cash to spend on their requirements. Typically, equity release schemes apply to homeowners over the age of 55, of which the majority of plans written are lifetime mortgages.
The amount borrowed is based on age of the youngest homeowner & the value of the property. This lump sum will be charged interest by the lender and normally added to the loan, thus increasing the balance over time. However, options now permit repayments of all, or part of the interest charged. Lifetime mortgages continue to run until the last person has died or gone into care, at which point the property is sold, lender repaid and any remainder passing into the homeowner’s estate.
Equity Release’s Increasing Popularity
The past few years have seen an unprecedented period of growth for an industry which historically has been tainted with adverse news stories. However, there are a number of major factors influencing the change in belief with lifetime mortgage products, culminating in the Equity Release Council announcing a record start to 2016. Figures show lending has risen by 21% for the first quarter of 2016 on a year-on-year basis and represents the highest Q1 lending levels on record.
A significant achievement, so what is driving the increasing volume of equity release sales?
Changing Needs in Retirement
Where equity release lending had previously been for aspirational reasons, we are now seeing ‘needs’ based borrowing to help finances in retirement. Equity release schemes are becoming the salvation for interest only residential mortgage borrowers with no repayment vehicle and repayment demands from their lender. For those not wanting to downsize, remortgaging to a lifetime mortgage enables them to remain in their property for life & enjoy the rest of their retirement.
We are also seeing the ‘bank of mum & dad’ coming to the fore by financially assisting the younger generations. By releasing equity from the family home, parents can provide a cash deposit, enabling children to move onto, or up the property ladder. This has often been referred to as providing an early inheritance, maybe at an age when the need is greatest?
Increasing Flexibility of Products
Lifetime mortgages now enjoy a plethora of features & options, which an equity release adviser can use to build a recommendation around a homeowner’s needs, both now & into the future. These new features are catering for the demand around retiree’s needs for extra funding given lower returns on savings, mortgage repayment demands from lenders and the rising cost of living expenses.
- Voluntary Repayment Options – certain lifetime mortgages can now accept repayments with NO proof of income necessary. Voluntary repayment schemes from the likes of Aviva and Legal & General will accept ad-hoc payments from homeowners of upto 10% of the original amount borrowed with no penalty. These repayments can assist in controlling the future mortgage balance and the ultimate inheritance for the beneficiaries. Many residential mortgagors are using these plans to switch to a lifetime mortgage, as they can maintain affordable payments in the same manner as previous.
- Fixed Early Repayment Charges – lifetime mortgage plans can be taken with the knowledge they can be repaid after a fixed number of years without penalty. The shortest period is now just 5 years, when a homeowner downsizes. In addition, companies such as Retirement Advantage and LV= offer fixed early repayment periods of 8 and 10 years respectively & can be selected to fit in with any future changes in circumstances.
- Lowest Interest Rates – new lenders, L&G in 2015 and One Family in 2016 have increased competition, driving down equity release interest rates to an all-time low. Rates are now comparable with residential mortgages which is making the switch to a lifetime mortgage less of a jump in monthly cost. With most rates being fixed for life, this provides a guarantee of future cost & affordability for homeowners.
- Increased Maximum Loans – we are seeing lenders revise their maximum loan limits based on age, property value and even health can be an influencing factor. Increasing the loan-to-value ratios has seen companies, such as Pure Retirement & More2Life facilitate larger loans helping those requiring the maximum possible lump sum. This extra capital can make all the difference for those looking to clear mortgages or other forms of debt consolidation and even house purchase.
- Regulation & Protection – all equity release schemes and advisers must be governed and regulated by the Financial Conduct Authority (FCA). This ensures there is potential recompense for consumers when redress is necessary. Additionally, the Equity Release Council (ERC) trade body provides a statement of principles which aims to promote high standards of conduct and practice in the provision equity release advice. The ERC has been instrumental in building consumer confidence & is celebrating its 25th anniversary year.
- Accessibility – using online equity release calculators and comparison tables, homeowners can now conduct research themselves before making their big decision. Companies such as Equity Release Supermarket specialise in providing a suite of tools to enable consumers to learn more about equity release schemes and whether they are suitable, or not.
Certainly 2016 has been a great start for both consumers & the industry itself and the next 12 months could mark greater innovation for homeowners over the age of 55 who need a flexible mortgage vehicle to enhance their retirement years. The tide has turned for the equity release industry to continue improving and build into a potential £5 billion a year industry by 2020.
For more details on equity release options and comparisons, click here or call 0800 678 5074
Mark Gregory is a director of Equity Release Supermarket.
These are lifetime mortgages & home reversion plans. To understand their features & risks, ask for a personalised illustration. There will be a fee for mortgage advice. This will depend on your personal circumstances, but we estimate this to be £895.
Equity Release Supermarket Ltd is authorised & regulated by the Financial Conduct Authority. FCA registered no. 584063.