Equity release has long been a fallback for “asset rich, cash poor” pensioners, and the first nine months of 2019 saw £2.8bn borrowed in this way against the value of people’s homes – a record.
But while they are popular, do they actually represent good value? And are they always the best option?
New analysis by financial data experts Defaqto shows that (on average) a couple who borrow £50,000 could save up to £38,000 over 20 years by opting for a retirement interest-only mortgage instead.
While interest rates now being quoted for new deals are at an historically low level, the fact that they are compound interest rates means that the total debt rises each month. By the time the debt is repaid – when the owners enter into care or die – there can often be little left for any relatives hoping for an inheritance.
So, would the relative newcomer to the market – interest-only mortgages aimed at retirees – offer a better deal? These loans allow you to borrow against your property and only pay back the interest each month – although some will require you to pay the sum back in full after a specified number of years or when you reach a certain age.
These have not proved as popular as the anticipated when they were launched in March 2018: the FCA had estimated that around 21,000 of the mortgages, worth £1.7 billion, would be sold every year by 2021 – but only 660 had been taken out by July last year.
So how do the sums add up?
Illustrative figures from Defaqto show that a 65-year-old with a £250,000 home borrowing £50,000 through an equity release would pay back a total of £123,756 over those 20 years (through the eventual sale of their home) if they borrowed at the current average market rate of 4.54 per cent.
With a £50,000 retirement interest-only mortgage, taken out at the average rate of 3.57 per cent, they would end up paying £35,700 of interest over those 20 years on top of the £50,000 loan which would also be due: some £87,500 in total, and slightly over £38,000 less than the equivalent equity release deal.
The borrower will, though be making a monthly payment, and this needs to be taken into consideration when budgeting for the future. With equity release, there are no monthly payments to make.
These calculations come with some caveats: not least the fact that interest rates for both equity release and interest-only mortgages vary widely, and both have been coming down considerably in the last few years in response to market borrowing rates.
The lowest interest rate currently available for equity release is 2.84 per cent from more2life. The lowest available for an interest-only mortgage is only very narrowly better at 2.79 per cent from Marsden Building Society.
Different loans of both types will also have their own terms and conditions – some of which may or may not prove suitable for individual borrowers.
The variations in interest rates and conditions, as well as the fact that raising capital in this way can also impact upon an individual’s entitlements to benefits and (in some circumstances) free social care, make it imperative for anyone considering tapping into the value of their home to seek independent financial advice first.
It can also be advisable to discuss the implications with relatives if they are expecting to inherit or to help manage that person’s money in the future (for instance, having the power of attorney over their finances).
Downsizing is another option to consider to unlock the capital in one’s home, but this is not always possible or desirable and there will be one-off costs associated with moving.
In short, if you want to cash in on your home, don’t make a move until you’ve looked at all your options!
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