Equity release – friend or foe
EQUITY release mortgages have grown in popularity, and for some, are likely to grow even more popular.
Are they viable, are there alternatives and what should you watch out for?
In a two-part column I'll cover these points to guide you through the pitfalls. All is often not what it seems.
Society's extreme contradictions have only become worse. The UK is no different. From a global successful London, to a left-behind rest of UK, run on low wage and low productivity labour, the divide becomes greater as does the need to survive.
West London real gross domestic product is more than six times the EU average yet the worst off UK regions are similar to the poorest areas of Spain and Portugal. A person living in Northern Ireland has 81 per cent of the purchasing power of an EU average and west London has 611 per cent.
Unnecessary pressure has been placed on the retired. ‘Brexit' nosedived sterling which naturally increased the cost of imports, which drove inflation and the cost of survival. The UK is a net importer, so it imports inflation (particularly energy), and those costs directly punish pensioners who are also achieving no real return on their savings. The retired have to suffer record low interest rates and juggle to see where they can access any further cash.
Last year the World economic forum announced the UK had one of the biggest pension gaps in the world at £25 trillion. Add to this the desire from parents and grandparents to ease the continuing hardship on students who seem to have accepted they: ‘will have a student loan', and a seemingly impossible ability to save for a deposit.
With one in two of us expected to suffer cancer at some point in our lives and the costs of private health care and operations soaring, it's not hard to see where the demand for cash is coming from, and why equity release mortgages are in demand. As some of the larger insurance companies and banks have moved into the market, the market has been predicted to grow from £2.2bn to £20bn. The US market is five times the size of the UK market.
The worrying word for me in protecting retirees and their children is ‘equity' – the fantasy bank account which is the gap between the perceived value of a home and the debt you are enduring.
Switzerland has the lowest home ownership in Europe at 42.5 per cent (UK is 63.4 per cent) but the highest wealth per capita at more than double the UK ($229k and $102k respectively).
However, the current UK economy has been built around home ownership, and as such there is an estimated £1.7trn sitting in the above ‘equity'.
There are many lenders in the market offering loans of up to 55.5 per cent of the value of your home in return for an interest rate of as low as 3.45 per cent. The loan rolls up and on death or early sale of the house, the total is repaid.
Some lenders will lend as much as £2,000,000 and as little as £10,000.
The attraction is clearly the ability to pull the rabbit out of the hat quickly, but as I explained to my daughters last week, it's very easy to spend £1,000, but much more difficult to save it or repay it.
Before considering ‘equity release', seek advice from your solicitor and Independent financial adviser and be sure your children come along and give their opposing views. It's better to debate this well before it's too late. Naturally consider all the alternatives and their advantages.
For example, consider grants and benefits. Remember that a sizeable release of capital can affect benefits you are already receiving and could be counterproductive. Other alternatives are selling your property to your children; downsizing; finance on your required purchase; or taking out a normal mortgage on your property and simply paying the interest each month.
Following the FCA's recent clarification on where lenders stood, the ‘silver borrower' can now borrow up to 60 per cent, but must repay the interest each month. Crucially they have no end date for repayment. More next week.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you would like to discuss equity release mortgages, please call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.