Over 37,000 homeowners used equity release as a way to earn income from their properties in the last year.
The average household released £62,500 from their home, which most received in one lump sum as a way to supplement their income or put towards an important lifestyle purchase or occasion.
The product is designed to let you borrow around 35% of the value of your existing property, and the provider will charge an interest of around 5% – 6% and take equity in your home. So when the homeowner dies or goes into long term care, the provider is able to claim the stake in the property and recover the money they have lent out.
There are currently 78 equity release products in available in the UK, a number that has tripled in the last decade, something that has seen the industry double in the last year to a valuation of £3 billion.
Who are the main providers?
With a handful of equity release providers in the industry, the most established ones include Aviva, Legal & General, and LV.
The rates offered by lenders vary and many will offer calculators on their website allowing you to see how much you can borrow and the rates charged. The lifetime mortgage option is flexible, allowing people to make full or partial repayments at any point, potentially reducing the overall debt and allowing for more inheritance to be passed onto their children.
Customers have the option to receive the full amount in one lump sum, tax-free, or receive a monthly or annual income to provide some stability.
Applicants must be over 55 years of age, homeowners and have equity in their homes to be eligible.
What is equity release used for?
Information shows that equity release is most commonly used by seniors as a way to provide income for the foreseeable future. With the ageing British population and increased costs of living, more homeowners feel they need a way to supplement their existing savings.
The main advantage of an equity release scheme is that is it allows residents to continue to stay in their home until they pass or move into a care facility.
Customers will commonly use this financial product as a means of consolidating existing debts, home improvements for their existing property and for funding lifestyle purchases such as family holidays, weddings, tuition for their children or to help their offspring get on the property ladder.
What are the risks?
In a turbulent economic market, your property can potentially be quite undervalued and this can limit the amount you wish to borrow, but give the lender a huge pay out when you die. Finding an opportunity for equity release in a booming property market can maximise the amount you can release. Equally, if you are making home improvements and increasing the value of your property, you should raise this with your provider in order to maximise the amount you can potentially take out.
Elsewhere, with rates charged higher than a typical mortgage, there are other products and alternatives that could be more cost effective. This includes downsizing which can also help you release a large amount of income upfront or applying for a second mortgage.
Whilst lenders will give you the option to repay early, the redemption fees can sometimes be as high as 25% – making the process rather unproductive.
If you live a very long life, the interest will continue to accumulate and mean that very little money can be left in inheritance for your children. Meanwhile, repaying early can be very expensive too. So understanding your risks, finances and amount you intend to leave as inheritance is key to make equity release work for you.