Does equity release mean trouble down the road?

WHILE the price of almost every other asset has lagged inflation sharply over the past year, UK house values ​​have managed to keep pace – and more.

The latest UK House Price Index, which reflects changes in the value of residential properties, was released this morning for May 2022. It shows UK house prices rose by 12.8% over the year to May 2022, compared to 11.9% in April 2022. This is even ahead of the general inflation rate of 9.4% announced on Wednesday.

The combination of high inflation and even higher house prices has many homeowners considering ways to leverage their housing wealth. This is reflected in new figures on equity release – the method by which homeowners can take part of their home’s value without having to make any repayments over their lifetime.

Industry figures from Key Later Life Finance, a stock release firm, showed sales of stock release plans jumped 21.4% in the first quarter of the year from the same point in 2021. The value of the paid-in shares reached £1.4bn – the highest on record – with the average paid-in amount standing at £111,500.

We can only speculate on the amount of the increase due to landowners who need money to make ends meet. We can be more certain that freeing up equity in this way – although it is the right option for some – will have a profound long-term effect on the finances of those who use this option.

Equity release comes in various forms and each plan will have its own rules. Generally, however, homeowners have the choice between a “lifetime mortgage” or a “return home” plan. Life mortgages are loans secured by property that do not require monthly repayments, although some loans offer this option. You continue to own your home and can live in it until you die or until you move into a long-term care facility, at which time the home is sold and the loan value and interest are paid on the product. If you have a partner who also lives in the property, the sale is deferred until he dies or is taken care of.

Home reversion plans involve selling part or all of your home to the equity release company. You receive a lump sum or regular payments from the provider and you can continue to live in your home rent-free.

While some equity release plans allow you to hold repayments, many who use them will want to opt out, instead letting the money they released be paid back once you no longer need it. the House. Readers need not be told that capitalization means that debt allowed to accumulate in this way – potentially over many years – will increase dramatically.

This clearly means that the value of the equity to be passed on after death is likely to be significantly reduced, possibly to zero, but it may also limit the options for those wishing to sell their home before then.

Retirement is a decades-long affair these days and your life at 60 is likely very different from your life at 90, and you may want to move or downsize along the way. It’s not impossible if you’ve used equity release before, but it will certainly narrow your options.

Read my colleague Beck Nunn’s article on the cost of care, which poses an important question for everyone to think about: can you afford to grow old?

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