Equity release borrowing soared by a third in 2022 amid cost of living crisis
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The release of equity to new clients increased by 31 per cent in 2022 compared to the previous year as £6.3bn of cash was drained from property.
The number of equity release plans closed during the year also rose 29 percent, bringing the total to 52,295, according to broker Key.
The typical shopper released £106,806 in equity from the value of his home, he said, two per cent more than the average of £104,792 in 2021.
Equity releases are rising: Older homeowners are releasing money from their properties to manage the cost of living crisis
But despite the increase in the loan amount, the average loan-to-value on mortgages fell by 1 percent to 28 percent. This was due to rising house prices.
Home equity release loans allow people over 55 to access some of the value built up in their home in the form of tax-free cash. The money must be paid back with interest through the sale of the property when they die or take long-term care.
Stock loan releases were broadly in line with pre-2020 levels for the first nine months of 2022, Key said, after a slump during the pandemic.
However, there was a spike in activity in the wake of September’s mini budget as mortgage rates rose to more than six percent.
Equity release is often used to initially pay off an existing mortgage, leaving the rest of the money to spend after retirement.
However, equity release rates were not spared by the surge in lending due to the mini-budget and the worrying chaos in the gilded market. This pushed rates up to 5.7 percent in the last three months of 2022, compared to 3.07 percent at the same time the year before.
Key also said older homeowners wanted to mitigate the effects of rising inflation, which peaked at 11.1 percent in October.
Nearly a third of borrowers who took on new equity release plans in 2022 (31 percent) used the money to pay down debt, compared to a quarter in 2021, while 27 percent used the money to pay off their existing to pay off the mortgage.
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Easing Nearly a third of equity release clients used the money they released to pay down debt
Existing equity clients have raised £203 million in further loans in 2022, while £513 million has been raised through drawdowns – a 44 per cent increase on 2021.
Will Hale, Key’s chief executive, said: “As inflation takes hold, those on fixed incomes or approaching retirement are considering how to manage their biggest expenses – while still factoring in possible future repayments.”
Jim Boyd, chief executive of the Equity Release Council, said: ‘These figures represent another significant step forward for a market that recorded barely £1bn of lending activity a decade ago.
Clearly the dust is still settling from Mini-Budget Fall. Short-term uncertainty aside, however, the long-term drivers that make real estate an essential part of modern retirement planning are fully intact.
“Any homeowner considering a share release in the current climate should seek both financial and legal advice, working with a member of the Council, to ensure that any choice is a good fit for their long-term needs.”
In recent years, some lenders have begun introducing new features such as allowing customers to pay off part of the loan or interest before they die or go to care if they choose to reduce what they owe are.
In 2022, Key said the majority of equity release clients (63 percent) opted for fixed-cost prepayment plans, preferring to avoid the uncertainty of gilded or variable costs.
Many are also opting for greater flexibility, with 61 percent opting for downsizing protection within their product. This allows the borrower to pay off their loan early without penalty if they move to another home that falls outside the lender’s credit requirements.
In addition, 29 percent of borrowers added probate protection. This is when a borrower forecloses part of their home’s value to pass on to their loved ones.
Nearly a quarter of the funds released in 2022 were equity remortgages. On average, customers moved £132,240 in loans from a 5.1 percent interest rate to a 5.0 percent interest rate.
This is a very modest saving and substantially lower than the figures recorded in Q3 2022, when customers went from 5.1 percent to 3.6 percent.
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