Should you bet the house in game of life

Puzzling over equity release?Puzzling over equity release?
Puzzling over equity release? | Sue Edmondson - stock.adobe.com
As a homeowner, should you use equity release to access cash from your property in later life? There are some good reasons to consider such a move, as well as very understandable reasons why many are wary of doing so, says Tom McPhail, director at consultancy The Lang Cat.

Typically, someone in their 60s, owning a home worth £350,000, for example, could access a lump sum of over £100,000. The loan is only repaid on death, meaning the borrower gets the benefit of using the capital sum for the rest of their lives, without having to worry about the outstanding debt. If they’re married, the loan runs until both parties have passed.

Given how many people are having to make do in retirement without quite enough money to live in comfort, on the face of it that seems something many might be interested in.

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Tom McPhailTom McPhail
Tom McPhail | Supplied

The commonest reasons people choose to use equity release are to supplement retirement income, pay off high-cost loans – such as credit cards –fund home improvements, and to help out other family members.

So why don’t more people release equity from their property? There are several issues that frequently arise.

Understandably, many are wary. Past mis-selling scandals mean the equity release market is viewed with suspicion and mistrust.

There’s also the obvious reality that depending on how much you borrow, the value of your house and so on, by the time you die any inheritance you hoped to pass on from your home may have evaporated.

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Add to this the uncertainty of the possible need to pay for later-life care, which is a bit of a lottery, both in terms of its likelihood and its possible costs. The cost of equity release is also higher than an ordinary mortgage, in terms of the interest rate charged.

The good news is that equity release these days comes with several protections. In response to the mis-selling we have seen in the past, the whole industry has cleaned up its act. It is regulated by the Financial ConductAuthority. Lenders offer guarantees with their loans, such as fixed rates, so you know at the outset exactly what terms you’re getting for the rest of your life. They guarantee that however long you live, the roll-up of the interest on the loan will never exceed the value of your house. They also insist you get proper legal and financial advice.

And the quality of the services and products on offer these days is a world away from the problems of the 1990s when equity release first started.

There’s about £2.5 trillion of housing equity owned by the over-65 age group in the UK. At the moment, tens of thousands of people take advantage of equity release every year.

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Over the years to come, more and more people are going to arrive in retirement without the benefit of a generous final salary pension scheme. At the same time, millions of their children and grand-children are finding it harder and harder to get on the property ladder themselves. It’s hard to see that demand falling.

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