Equity release boom isn't as safe as houses

The number of homeowners in Scotland unlocking the cash tied up in their homes continues to rise after the EU referendum result fuelled concerns over retirement incomes.

The most popular form of equity release is a lifetime mortgage, where those aged 55 or over can take out a loan against their property

Demand for equity release plans was on the rise even before the referendum on 23 June. But it has since surged, according to one Scottish legal firm, which pointed to a further squeeze on pensioner incomes and a shortage of downsizing opportunities.

Equity release, which allows homeowners to unlock the equity tied up in their property while continuing to live in it, has become increasingly popular in recent years despite lingering anxieties over high costs, unsuitable advice and a lack of choice.

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A record £514 million was taken out of homes using the plans in the three months to the end of June, Equity Release Council (ERC) figures show, up more than a third on the same period in 2015.

More than 700 plans were taken out in Scotland in the first half of the year, said Key Retirement Solutions. Those homeowners released an average of £54,468 from properties with an average value of £181,151.

The second half of the year could be even busier. Scottish solicitor Boyd Legal, which advises on equity release, said it dealt with 54 new cases in June alone, a 25 per cent increase on the same month last year.

Demand has been driven by a number of factors, including the difficulty of freeing up sufficient funds through downsizing and the paucity of returns available on cash savings, which retirees tend to rely on heavily for a regular income.

Those factors have become even more significant in the wake of the EU referendum, claimed Peter Boyd, managing director of Boyd Legal, who described the immediate impact on equity release inquiries as “quite incredible”.

“For one, the Bank of England has now responded as expected by reducing interest rates to a new record low and savings have yielded little or no return since the 2009 – impacting retirees the hardest,” he said.

“A shortage of smaller homes emerging to the market has also limited downsizing – and the ability to free up equity in a larger home. Add to the mix the post-vote general economic uncertainty – and the public concerned about investments – and it is little surprise equity release services are seeing unprecedented demand.”

The impact of Brexit on demand for equity release may not stop there. The fall in 10-year gilt yields since the referendum has sent annuity rates tumbling and intensified the pressure on pension scheme liabilities. The longer-term implications for pension incomes may force even more people to fund their retirement with the equity tied up in their home.

Equity release providers are also benefiting from the first big wave of maturing interest-only mortgages where the borrower has no repayment plan in place.

The most popular form of equity release is a lifetime mortgage, where those aged 55 or over can take out a loan against their property. The loan and the interest is usually repaid with the proceeds of the eventual sale (typically when the borrower has died, gone into care or moved in with family).

The interest is rolled up or compounded over the duration of the loan, which means the amount borrowed will increase the longer the debt is maintained.

Most borrowers take out drawdown lifetime mortgages, where they can take out small chunks of equity rather than the whole amount. Some are also taking advantage of relatively new products (from specialists including Hodge Lifetime) that work more like normal mortgages by allowing monthly interest repayments.

Sales of the products are booming despite ongoing reservations about them. A 2013 report by the Financial Services Consumer Panel highlighted poor competition in the sector, high and unpredictable exit penalties, a lack of product innovation, confusing and changeable product terms and high barriers to new entrants.

There are still competition issues, although Santander is to enter the market in partnership with Legal & General Home Finance and other banks are tipped to follow. There are also misgivings over conflicts of interest among some of the main providers and advisers

The industry has made improvements, however. Among the safeguards put in place by the Equity Release Council (ERC) are a no-negative equity guarantee (which means borrowers can never owe more than the value of their home) and a right to remain in the property for life or until needing to move into permanent long-term care, provided the property remains their main residence.

There’s also a “triple lock”of sorts, referring to the FCA’s regulation of the market and the requirement to use both a professional intermediary and an independent solicitor.

But while many of the concerns around equity release have been addressed, there are still several downsides to consider. One is the cost. The average interest rate on a fixed equity release deal is currently 6 per cent, according to Moneyfacts, down from 6.3 per cent in 2014. The cheapest is from Legal & General, at 4.4 per cent APR, while Scottish Building Society and Hodge Lifetime are among the others offering below average rates.

Others remain well above the 6 per cent mark, however, so it’s vital to shop around as the interest can mount up dramatically over time. Look out for the additional fees too, said Rachel Springall, finance expert at Moneyfacts.

“Borrowers would be wise to digest independent advice before entering any arrangement as interest rates on these loans can vary considerably, plus there are set-up fees to pay too,” she said, referring to advice fees, solicitor fees, product fees, etc.

“Property prices can fall as well as rise, so borrowers need to feel confident they can pay the loan back at the end of their lifetime or by selling their home.”