House equity

Stock release funds £3bn of spending as over-55s cash in on homes

Cashing in on the value of their home funded £3billion of outgoings by the over-55s last year, as they used the money to supplement their income and cover day-to-day expenses.

It is estimated that one in every £90 spent by pensioners in the country last year was the result of capital release, according to new figures from Legal & General and the Center for Economics and Business Research.

As the cost of living crisis puts increased pressure on pension funds, the trend towards freeing up equity, where homeowners can borrow against the value of their home, looks set to continue.

Market analysis by mortgage broker Henry Dannell shows UK homeowners have already freed up equity to the tune of £1.4billion so far in 2022, with that figure estimated to be nearly £5.6 billion by the end of the year.

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Demand for loans later in life is increasing as the cost of living crisis puts pressure on pension funds.

In the first three months of this year, more than 12,500 homeowners opted for end-of-life mortgages, an increase of 21.4% compared to the first quarter of 2021.

Capital release loans, also known as later-in-life mortgages, unlock accumulated value in a home, allowing them to access it as tax-free money.

They allow owners aged 55 and over to obtain a guaranteed loan on their home, worth up to 60% of its value, while remaining the sole owner. They can use the money for whatever they want.

The loan and accrued interest are then repaid through the sale of the property when the last surviving borrower dies or enters long-term care.

However, as interest accrues it can become a substantial part of a home’s value and therefore some offers offer the option of paying off interest to protect inheritances.

While the majority of the money released, £1.9bn, was used to pay for occasional large purchases such as home improvements, furniture or even a new car, a significant amount, £1.3bn pounds, is used to cover the cost of the day. -living expenses, including food, clothing and transportation.

The remaining capital, around £480million, is expected to be spent on international vacations and financial planning.

Maintaining the standard of living in retirement (16%) and repaying personal debt (16%) are also cited as reasons for turning to discharge.

Retirees are turning to mortgages later in life to pay for everything from home improvements and vacations to day-to-day expenses, including groceries and clothing.

Retirees are turning to mortgages later in life to pay for everything from home improvements and vacations to day-to-day expenses, including groceries and clothing.

Craig Brown, managing director of Legal & General Home Finance, said: ‘Our report highlights that homeowners are increasingly considering using the release of equity or other means of accessing property wealth to help finance later life.

“This change reflects the boom in real estate values, which have made our homes such an important asset, but it also shows how far the capital release market has progressed through the introduction of product innovations and how it has become a more suitable solution for a wider range of people.

In total, the growing UK elderly loan market is worth up to £153.9 billion, according to AKG Financial Analytics.

This includes standard mortgages, retirement interest only, or capital release mortgages for borrowers over 55.

In addition, around 50% of advisers have seen an increase in demand for senior loan advice over the past year and 58% expect demand to increase over the next 12 months.

Geoff Garrett, director of Henry Dannell, said: “End-of-life mortgages have continued to grow in popularity among homeowners across the country, many of whom are now benefiting from the dramatic increase in the value of their property over the past two last years.

“For some it’s become a safety net to weather the rising cost of living, but we’re also seeing this increased activity being driven by those at the top of the market, who may not be facing to the same financial difficulties as the average owner.

Equity release: how it works and tips

To help readers consider equity release, This is Money has partnered with Age Partnership+, independent advisors specializing in retirement mortgages and equity release.

Age Partnership+ compares offers across the market and their advisors can help you determine if equity release is right for you – or if there are better options, such as downsizing.

Age Partnership+ advisers can also see if those with existing equity release agreements can save money by switching.

You can compare equity release rates and determine how much you could potentially borrow with This is Money’s new calculator, powered by broker Age Partnership+.*

*Partner link: If you subscribe to a This is Money product, you will earn a commission. We do not allow this to affect our editorial independence.

This is due to a number of factors – greater product choice and greater flexibility means that end-of-life mortgages are no longer the rigid and complex instrument they used to be and a competitive loan market has also helped reduce the cost of removing equity from a property. ‘

However, equity release products are not without drawbacks.

Debt held on your home increases with accrued interest and can represent a significant proportion of the overall property value. And although the loan and interest can be repaid upon death, the repayment will reduce the value of an inheritance.

Some equity release products offer the option to repay interest over time.

Or you can take out a series of small life mortgages over the years. This way, you won’t pay interest on the total sum for the entire period, so you’ll owe less.

It is also important to note that once you have taken out a capital release loan, it is unlikely that you will be able to use your home as collateral for any further borrowing.

And there’s an argument that it’s better to leave your money invested in your home than cash in your bank account. In addition, cash freed up through mortgages later in life may affect your eligibility for means-tested benefits such as pension credit or municipal tax credit.

Currently, 5% of owners are using capital release to fund their retirement, but this figure is expected to nearly double to 10% depending on young owners’ anticipated plans.

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