Equity release borrowing is set to hit an all-time high this year, with older homeowners using cash from their homes to pay off debts and help out their families during the pandemic.
More than £1bn was borrowed in the three months to the end of September, according to equity release advisor Key’s quarterly market monitor.
This was an 19 per cent increase in the amount of money released compared to the £884million recorded in third quarter of 2020, and put borrowing on course to surpass £4billion by the end of the year.
Equity release allows homeowners over 55 to access the wealth tied up in their property
Individually, the typical homeowner took £101,593 of equity out of their property – 23 per cent or almost £20,000 more than the £82,827 average in the same period in 2020.
Key said this was due to homeowners using equity release as a way to pay for ‘big-ticket’ spending – particularly clearing existing debts or helping out their families financially.
Almost three-quarters (73 per cent) of cash released from homes was used for one of these two purposes, it said.
Equity release, also known as a lifetime mortgage, is a way for homeowners aged 55 or over access some of the money tied up in their property tax-free.
Borrowers get a loan secured on their home – which may be up to 60 per cent of its value – while still remaining the sole owner. They are then free to use the money for anything they like.
The loan needs to be repaid, with interest, through the sale of their home once they have died or gone in to long-term care.
Key said that around £588million of the money released in the three months to September was used to clear debts. The average sum used to repay debts was £23,500.
There has been a spike in equity release cash used to repay unsecured debts and mortgages
The largest proportion of funds were used to repay an existing mortgage, according to Key
Of the cash gifted to family members, more than two-fifths (42 per cent) was used for house deposits.
This may have been a result of the huge house price increases witnessed in the past year, which have put homes out of reach for some, especially first-time buyers.
The latest estimate from Halifax suggests prices have risen by £31,500 since the pandemic began.
A further 36 per cent of equity release money was given as an early inheritance.
During times of social and economic uncertainty, equity release is used to meet pressing needs such as debt repayment or supporting families
Those equity release borrowers who did gift deposits to friends and family gave them an average of just over £55,000, while early inheritances amounted to an average of almost £30,100.
The Key report read: ‘Typically during times of social and economic uncertainty, equity release is used to meet pressing needs such as debt repayment or supporting wider families via gifting, rather than discretionary spending on holidays or home improvements.
‘While the pandemic certainly qualifies as a period of uncertainty, other factors such as the stamp duty holiday, low interest rates and lockdowns have also impacted on customers choices.’
‘Recycling’ housing wealth down the generations
The chief executive of the Equity Release Council, Jim Boyd, said equity release was becoming a ‘multi-generational financial planning tool’ whereby older people could use their housing wealth to help younger relatives.
‘The ability to ‘recycle’ housing wealth is transformative for many families when it comes to younger generations’ ambitions to progress in life, from buying a home and getting married to continuing in education and starting a business,’ he said.
However, others sounded a note of warning about older borrowers perhaps being pressured into gifting large sums of money to their families, and urged them to get the right advice.
‘Feedback from some clients is that the pandemic made them re-evaluate what’s important to them and, understandably, family comes out on top.
‘However, as advisers it’s our job to ensure that people are entering into equity release equipped with all of the information about how the borrowing will affect them now and in the future.
‘We also need to make sure that people aren’t borrowing more than they need to, as there are so many options now to release money in instalments as and when you need it, rather than a lump sum.’
Other ways that equity release borrowers spent their money included on their home and garden (37 per cent) and holidays (9 per cent).
However, some believe that now the financial effects of the pandemic are wearing off for some, there will be a return to older people spending the money they have taken out of their homes on enjoying their retirement.
Do your homework: Homeowners are urged to consider the implications of taking out an equity release product carefully. It is a legal requirement to get professional advice
Claire Singleton, CEO of Legal & General Home Finance, said: ‘Lifetime mortgages have long been used to support debt management and gifting, but at Legal & General Home Finance we are also now seeing early indicators that people are returning to aspirational spending that was popular pre-pandemic, with a resurgence in borrowing to support travel and family celebrations.’
Although the amount of money released from homes has increased in the past year, Key’s report found that the number of equity release plans taken out decreased by 3.2 per cent year on year to 10,333 in the year to end of September. It also remained below pre-pandemic levels.
Customers are also increasingly remortgaging the equity release plans they have already taken out.
Key estimates that by the end of September the market transacted 3,000 remortgage cases with customers on average moving borrowing of £134,597 from a rate of 5.1 per cent to 3.6 per cent.
The typical rates on equity release mortgages have edged up slightly this year
Interest rates on equity release mortgages have reduced in recent years, and some products now have more flexible terms allowing borrowers to pay off interest as they go for example.
However, rates have increased slightly from the first quarter of this year, when they were around 2.84 per cent, to an average of 3.16 per cent now.
The report said: that rates were unlikely to rise to their previous highs of more than 6 per cent however.
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