Pension aged individuals can access the equity (cash) tied up in their homes through either home reversion plans or lifetime mortgages. Once the cash is released the saver is free to do with it what they wish and new research from Key, the equity release advisory company, has shed light on what savers are doing with their new funds.
According to their findings, two-fifths (41 percent) of equity released in the first half of 2020 was used to pay off debts.
Over 40 percent of the total amount of new equity released (which equates to around £588million) was used to clear some form of borrowing with mortgages (53 percent) followed by credit cards (47 percent) and loans (36 percent) being the most common repayments made.
Key provided the following analysis on their figures: “While using income to repay borrowing can be a better approach in certain circumstances, this is not always possible for some over-55s who find that they either need to repay a significant and unaffordable lump sum –in the case of an interest-only mortgage – or are unable to pay much more than the interest on other borrowing.
“With 56 percent of equity release plans allowing adhoc capital repayments and 38 percent facilitating regular payments to service interest and so avoid costly roll-up, customers can find that they are better able to manage their borrowing through appropriate use of these flexible product features.”
Region wise, over-55s in Yorkshire and Humberside, London and Wales use the largest proportion of the equity they have released to repay debt, while those in the North East and Scotland use the least.
It was also found that Londoners use more equity than any other region to repay mortgage borrowing – potentially due to the capital’s high house prices – while those in Wales are most likely to repay credit card borrowing and those in the North East to clear loans.
Will Hale, the CEO at Key, provided the following comments along with the research: “While most people want to reach retirement debt free, this is simply not the case for everyone – especially those who have taken out interest-only mortgages and now often face finding a substantial lump sum to repay the balance.
“In H1, over £500million worth of borrowing was repaid using housing equity – allowing people to retire with confidence, without the burden of needing to make regular monthly payments or facing the prospect of having to sell their home
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“With equity release rates starting from under 2.5 percent and many products allowing adhoc capital repayments or ongoing interest repayments, these flexible plans allow people to proactively manage their borrowing and shore up their finances.
“Something that is arguably more important than ever given the current economic uncertainty”
Engaging with equity releases may seem like a good option for those who want or need some extra money but there are some important factors that should be considered before action is taken.
Equity release can be more expensive in comparison to ordinary mortgages.
If a person takes out a lifetime mortgage, which according to the Money Advice Service is the most common route for equity releases, they’ll likely be charged a higher rate of interest than they would have been charged on an ordinary mortgage.
It should also be noted that for lifetime mortgages, there is no fixed “term” or date by which people are expected to repay their loan.
The rate of interest that will be charged on a lifetime mortgage will not change throughout the life of the contract.
Additionally, home reversion plans are unlikely to award the applicant “anything near” to the true market value of the home when compared to selling the property on the market according to the Money Advice Service.
For retirees with limited resources, applying for an equity release may not allow them to rely on their home for money or support in their later years.
Significant consideration should be given before deciding on whether equity release is the best option available.
Whether it’s the right choice or not will be dependent on various circumstances, which can include:
- The applicant’s age
- The applicant’s income levels
- How much month the applicant wants to release
- The applicant’s plans for the future
Published at Thu, 20 Aug 2020 23:01:00 +0000