Equity release lending hits record high in 2016
Equity release lending in the UK surpassed £2 billion for the first time in 2016, marking a landmark year for the sector, according to the new figures from the Equity Release Council.
The lending figure represents an increase of 34% on 2015, with an additional £542 million of lending activity. This is double the rate of growth experienced from 2014 to 2015 (16% and £225 million).
Equity release is a kind of reverse mortgage on your house. The maximum loan-to-value ratio depends on the borrower's age, but it can be as high as half the value of the house for those over 80. The interest on the loan rolls up - so interest accumulates on interest added to the loan - but no loan repayments are due until the borrower dies or moves into long-term care.
Lump-sum mortgages popular
From October to December 2016, 8,303 new equity release plans were taken out, which is an increase of 12% from the previous quarter and up 30% year-on-year.
Lump sum lifetime mortgages proved popular in 2016, with the number of new plans increasing by 26% year-on-year. This increase outstripped the rate of growth in drawdown products, which rose 19% by volume over the same period.
However, it is important to note that lump sum equity release can be very costly in the long run, compared to drawdown plans, because the interest on a lump sum amount can be very high.
On average, people are charged 6.2% interest on their loan annually, and a typical loan can double in size about every 10 years as the interest compounds.
Nigel Waterson, chairman of the Equity Release Council, comments: "2016 has proven to be a historic year for the equity release sector. Passing the £2 billion mark for the first time indicates that housing wealth is becoming an increasingly important focus of retirement planning.
"With increased recognition of the role housing wealth can play, we look forward to working closely alongside government, regulators and industry to help support the UK's ageing population."
Equity release should be a last resort
Equity release is likely to remain popular because the generation of baby boomers, people who are currently between 52 and 70 years old, are retiring.
In the UK, this generation has benefited from free higher education, final salary pensions and, most crucially, exponentially accelerating house prices.
But while this is more than following generations can ever hope to enjoy, baby boomers are not equally affluent, and many pensioners fall into the 'asset-rich but cash-poor' category.
Their homes have become the main repository for many people's wealth, and it is no surprise that there is growing demand for ways to convert bricks into cash. In addition, record low savings rates have added to the appeal of equity release.
"These products could suit someone who is short of money in retirement," says Bernie Hickman, managing director at Legal & General Individual Retirement. However, anyone interested in a lifetime mortgage should take professional advice and understand the implications of taking one out.
"Despite the flexibility and 'security' provided by equity release, it still has to be considered a last resort because compound interest builds up and makes it expensive," says Simon Webster, managing director at Facts & Figures: Chartered Financial Planners.
"Albert Einstein said compound interest is the greatest force in the universe, and compounding is the problem. If you live a long time, your initial loan will grow into a much larger one.
"If house prices fall, you can end up with no equity in your house." Webster says people choose to take out a lifetime mortgage "because they need the money".
Ultimately, equity release should be a fall-back position, says Adrian Walker, retirement planning expert at Old Mutual Wealth.
Before committing to a lifetime mortgage, people should consider downsizing and other alternatives.
This story was originally written for our sister magazine, Money Observer.
An equity release scheme, where the money borrowed against equity in the property (up to a maximum of 50%) is subject to interest charges and although the borrower makes no payments during their lifetime, the monthly interest repayments will roll up and be added to the original debt, which will be settled on the borrower’s death. A lifetime mortgage is distinct from a home reversion scheme in that the lender never owns part of the property. But most lifetime mortgages are sold with a no negative equity guarantee. This means that if the loan is greater than the property’s value it’s a problem for the original lender and not the homeowner.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
This is effectively paying interest on interest. Interest is calculated not only on the initial sum borrowed (principal) or saved (see APR and AER) but also on the accumulated interest. The more frequently interest is added to the principal, the faster the principal grows and the higher the compound interest will be. Compound interest differs from “simple interest” in that simple interest is calculated solely as a percentage of the principal sum.