Gareth Shaw: Not all is equal in equity release schemes
AFor those unfamiliar with the concept, equity release is a financial product that allows you to cash in on the equity you have in your home. You either take out a mortgage against your home for the rest of your life, known as a ‘lifetime mortgage’, or sell a share of your property to a lender in exchange for cash.
Equity release can be a way of paying for renovations in your home, topping up your retirement income or be used to pay for later life care. It enables you to tap into the wealth you have built up in your property and, crucially, you don’t need to pay back the money until you die or move into care and sell the property.
The downside is that you’re charged quite a hefty interest rate to use equity release and the debt you accrue can mount up very quickly – eating into the equity in your home and leaving little behind for your loved ones when you die. Rates are typically higher than standard mortgage rates, usually around 5 per cent.
You currently have around £225,000 worth of equity in your property, and the same amount of debt. But how much you have left in 15 years’ time will depend on how much your property grows by.
Assuming an interest rate of 5 per cent, your debt will have risen to £467,000 by the time you reach 96. If house prices grew by 1 per cent a year, you’d be left with £54,000 in equity. If they rise by 2 per cent a year, you’ll end up with £137,000 left. At property-price inflation of 3 per cent, you could end up with a similar amount of equity as you have now.
This might suggest that it would be sensible to reduce the amount of debt that you have, to protect as much of your property’s equity as possible for your heirs. If you cut the debt down to £125,000, in 15 years’ time your debt would have grown to £260,000. This would leave you with a minimum of £190,000 equity (assuming your property’s value were to stay the same over the next 15 years).
Unfortunately, neither of us has a crystal ball and knows where property prices will go in the future, so it is difficult to say whether paying down the debt will actually be the best option for you. And there are a few more complications to consider.
Equity release is structured in such a way that it doesn’t need to be repaid until you die or move into care. As such, not all deals allow you to make partial repayments. If, as you suggest, you took out equity release many years ago, you should check to see whether the contract you have with a provider allows you to make any partial payments at all.
Today’s deals tend to allow you to make ad-hoc payments, but put a limit on how much you can repay without charge. This is typically a maximum of 10 per cent of your outstanding loan each year so in your case, you would only be able to repay around £23,000 this year. Repay any more than this and you could face a penalty. This can be around 5 per cent but is sometimes far higher, as it can be calculated in a complicated way, based on government bonds.
It’s great to hear that both you and your wife are maintaining good health in your later years, but if either you needed private care, which can be incredibly expensive, it’s worth considering whether or not you have any money put aside to meet that, given that you have already utilised equity release and may not be able to tap into your home again without selling it and downsizing.
It’s worth a discussion with your children, and I would suggest speaking to a professional financial adviser to discuss your options.
You can find out more about what to ask at which.co.uk/financialadvice, or use the Money Advice Service’s Find an Adviser directory at directory.moneyadviceservice.org.uk.
Gareth Shaw is Head of Money at Which?.