Popularity of equity release soaring as millions of households struggle

Record numbers of homeowners are looting the value of their homes to help pay rising household bills.

The popularity of stock releases is skyrocketing as millions of households struggle to keep up with day-to-day expenses such as energy, food and fuel bills. Legal & General, one of the largest lenders in the UK, says 25 percent of homeowners taking out loans do so to supplement their daily income, up from 19 percent last year.

Another lender, Canada Life, says the proportion of borrowers taking out loans for this reason has more than doubled from last year.

Stock releases have become increasingly popular in recent years as homeowners take advantage of the rising value of their property.

Traditionally, these loans – also known as lifetime mortgages – have been used to finance major purchases, such as home improvements, one-time vacations, or to help younger relatives with school fees or home deposits.

With rising household bills, thousands now use the loans just to make ends meet. Jim Boyd, chief executive of the trade association Equity Release Council, says: ‘No area of ​​the country’s personal finances will be unaffected by the current economic pressures from the UK.

Stock release products are often used to supplement retirement income and fund one-time expenses, so it follows that more people may be considering these options in an environment where prices are rising faster than incomes and where unexpected costs can be a major concern. cause.’

Craig Brown, chief executive of Legal & General Home Finance, added: “As the cost of living crisis deepens, we are seeing more homeowners using real estate to boost their tighter income, bolster their bank balances to create a safety net and, in the case of donations, also extend that safety net to their loved ones.’

How stock release works

Equity release mortgages are similar to conventional mortgages. However, they are only accessible to homeowners over the age of 55.

Unlike standard mortgages, where the interest and capital must be paid off each month, equity release mortgages have the interest rolled up. This means that repayments are not required until the property is sold, usually after the owner has passed away or moved to a residential care facility.

However, interest bonds due make it a significantly more expensive way to borrow than a conventional loan.

It is gaining popularity

A total of £4.8bn was taken from UK homes last year, according to the Equity Release Council. The number of new plans increased by 26 percent year over year between April and June.

Andrew Thirkill, founder and chairman of Age Partnership, the largest stockbroker in the UK, says the company is receiving 50 per cent more applications than this time last year and they are at the highest level since he founded the company in 2004.

“After years of sustained house price increases, many people have high equity in their homes, while at the same time facing spending pressures, making them consider making wider use of it,” he says.

But be warned…

Taking out an equity mortgage is a big decision and not suitable for everyone. It is critical to first obtain independent legal and financial advice from a member of the Equity Release Council.

Of course, it’s also worth talking to your family before continuing. Debt can grow significantly over the years, which can make a significant difference in the value of your estate and the amount your beneficiaries will inherit when you die.

Experts also warn against taking out a product that will last a lifetime, simply to cover the temporary cost of living.

There are alternative options that should be considered first.

For example, look at your budget and see where you could save. Check whether you are entitled to all benefits owed to you. Go to gov.uk/benefits-calculators.

If you’re struggling with debt, you can get free advice and help from organizations such as Citizens Advice, Money Helper, National Debtline, and StepChange.

You may also want to consider using other funds to supplement your income. For example, a short or medium term loan may be a better option for one-time purchases and it may make more financial sense to use savings or retirement.

Slimming down is also a popular way to either pay off an existing mortgage or free up capital without taking out a new mortgage. Supplementing income with a boarder can also be an option.

Offers have been improved

For years, releasing equity has been seen as the less reputable end of the mortgage loan market, with people tied up with expensive loans that quickly add up to a much larger amount than the amount originally borrowed.

But due to stricter regulations, more competition and more flexibility, products have improved considerably. However, borrowers can still be stuck with early exit fees if they want to pay off the loan. In addition, stock release products cannot always be easily transferred to a new home if the borrower moves, such as into a retirement complex.

The Financial Conduct Authority looks to the stock market to ensure consumers are properly advised. Advice includes considering a potential borrower’s full financial position and all alternatives, and allowing ample time for thoughtful consideration and discussion with loved ones.

How much do they cost?

Interest rates had fallen to 2.5 percent last year, but have since risen. The average rate in August was 5.74 percent, according to the Equity Release Council and rate-scrutineer Moneyfacts.

Rates are likely to climb even higher as the Bank of England raises the base rate – the benchmark from which other rates are set – to counter rising inflation.

An equity release loan of £25,000 at the current average rate would rise to £41,185 in just ten years. This assumes that the borrower pools the interest in the loan and does not pay anything off. In comparison, a conventional loan for the same amount, with an interest rate of five percent, would cost £31,657 over ten years, in fixed monthly installments.

The Mail on Sunday has released The Complete Guide To Equity Release, written by Jeff Prestridge, editor of Personal Finance. Call 0808 239 5293 or visit mailfinance to request your free copy. co.uk/unlockcash.