Older people are withdrawing £10m a day from their homes – adding up to £3.4bn last year – and it’s not just for new kitchens and dream holidays. New research reveals a surge in the number of people turning to equity release in order to pay off debts and mortgages.
Equity release is becoming an increasingly mainstream proposition, and rates on these deals have fallen to record lows, making them look more tempting. The lowest interest rates are now below 3%, whereas five years ago you would have done very well to get 5%.
Lower rates make a big difference to what you can end up owing. To give a very rough example, someone aged 71 who wants to release £60,000 as a lump sum might, after 20 years, be looking at owing a total of £106,000 (the loan plus interest). That might sound like a lot, but it’s much less than the £166,000 that someone who was 71 in 2015 would owe after 20 years.
However, these are complex products, and there are downsides.
So if you are an older homeowner who is short of cash, should you consider taking the plunge? Or are there better alternatives out there, such as the so-called “retirement interest-only” (Rio) mortgages that some lenders have launched?
The basics
Equity release is a way for older people – the minimum age is usually 55, and sometimes 60 – to get cash out of their property without the need to move home. Typically there are no monthly repayments. Leading providers include Aviva, Legal & General, more2life, LV= (Liverpool Victoria), Just and Canada Life. The average amount released last year was £75,600, according to over-55s specialist adviser Key.
But equity release can be an expensive way to borrow. The way these schemes work means you end up paying interest on interest, so the total owed can balloon. For most, the most financially effective way of freeing up cash is to move to a smaller property or cheaper area.
Types of scheme
The most common are mortgage-based products secured against your home, repaid from the sale of the property when you die or go into long-term care. These are known as lifetime mortgages and allow you to take out a loan on your property in return for a one-off lump sum or regular smaller sums.
These deals are becoming more flexible – a growing number include a feature called drawdown, where a pot of money is set aside for you to draw from when you need to.
This is popular because not everyone needs a big lump sum at the outset, and because you only pay interest on the cash you release.
How much can I borrow?
This will vary and depend on your age, the value of your property and sometimes your health. According to the firms’ website calculators, someone aged 75 with a £300,000 house could typically borrow:
• £145,500 from Just
• £145,500 from Legal & General
• £141,000 to £163,500 from more2life (depending on how healthy you are)
• £123,000 from Aviva
At age 85 those figures rise to £168,000 for both Just and L&G, £159,000-£163,500 for more2life, and £156,000 for Aviva.
What are the rates like?
“Over the last few years rates have fallen significantly and it is not unusual to see clients taking out products with sub-3% interest rates,” says Will Hale at Key. For example, rates at more2life start at 2.67%.
What is the money used for?
The latest customer data from LV= shows that 27% of customers in 2019 used equity release to clear their mortgage, loans or debts – up from 15% in 2016. Almost one in four customers (24%) used some or all the cash for home and garden improvements. Others splash out on holidays or help family and friends.
Give me an example
A couple, both 71, have a £350,000 house and want to release £60,000. Key looked at two scenarios for Guardian Money: releasing the cash as a lump sum or releasing an initial £20,000 and withdrawing four lots of £10,000 at the end of years three, five, eight and 10. These are based on an interest rate of 2.89% from more2life, available through specialist advisers.
Under the first scenario the amount owing – loan plus interest – would be £69,000 after five years and £80,000 after 10 years. After 20 years it would be £106,000.
Under the second scenario the amounts owed would be lower: £33,000 after five years, £62,000 after 10 years, and £90,000 after 20 years.
Many equity release products offer borrowers the opportunity to make interest repayments if they wish. If the couple did this, the balance outstanding would simply reflect the total sum they had borrowed on equity release, provided all monthly interest repayments had been met. At the end of 20 years, in both scenarios £60,000 would be owed.
What about Rio mortgages?
These are a new type of interest-only mortgage for older people. They might appeal to those put off by the idea of equity release.
Rio mortgages are effectively standard home loan deals with one big difference: the mortgage doesn’t usually have a set end date and carries on until the borrower’s death, or they move into a care home. Until then, the borrower continues to pay the interest each month, and the loan is ultimately repaid from the sale of their property.
There are now more than 70 Rio mortgage products on the market, with rates starting at 2.74% courtesy of Nationwide, according to data provider Moneyfacts.
The good news about Rio mortgages is that they will often work out cheaper than equity release over the longer term, according to number-crunching by financial information firm Defaqto. The bad news – apart from the fact that you must make monthly repayments – is that you have to undergo affordability tests similar to a standard mortgage, and anecdotal evidence suggests many people are failing because the tests are pretty strict.
You will need to show that you can afford the mortgage payments as well as all your living costs, which probably means you will need to be getting a pretty chunky pension income. For many older people that will be a tall order. Also, most Rio rates aren’t fixed for life, as is the case with equity release.
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