Nearly half of the over-55s have been preparing their finances for the tough times ahead by paying off their debts using equity release. According to data from Key’s Market Monitor report, 44% decided to switch their debts in the first six months of 2020, up from 37% in the same period last year.
Paying off debt using equity release allows the borrower to stop making monthly repayments, freeing up their day-to-day cash and ensures no risk of having their home prepossessed or legal action for non-payment of a debt. There is also no tax to pay on money borrowed under equity release.
The worsening economic climate, coupled with historically low interest rates, is making equity release more compelling for debt consolidation. For example, the best APRC for a lifetime mortgage (the most common form of equity release) is now 2.5%, compared to the best five year fixed rate mortgage at 2.8%. The average interest rate for a lifetime mortgage has dropped from 4.89% last year to 4.26% now, and borrowers will find more choice available, with 132 more lifetime mortgages available this month compared to July last year.
However, the effect of the Coronavirus lockdown on the demand for equity release overall has been a reduction in 2020. The number of plans sold has dropped by 10% in the first half of 2020 compared to the same period in 2019. Those wanting equity release for holidays and home improvements have both reduced so far this year as the Coronavirus lockdown placed severe constraints on holidays, travel and the ability to source materials and labour for home improvements.
Those looking to repay their debts using equity release will find their monthly outgoings reduce as a result, but borrowers need to consider that a lifetime mortgage has compounding interest costs. While they save today, the cost over time will likely be greater and will erode the value of the inheritance they can leave in their will.
This cost of borrowing with a lifetime mortgage increases the longer the debt or the interest remains unpaid. For example, borrowing £80,000 at 3% would cost £12,741 in interest after five years and £27,513 after 10 years. Those lenders that are members of the Equity Release Council offer a no negative equity guarantee, meaning borrowers will never end up owing their lifetime mortgage lender more than the value of the property. There are also options to protect a minimum sum for the purposes of inheritance.
Borrowers can mitigate the costs of interest on a lifetime mortgage by either choosing to make repayments or using a drawdown facility. Borrowers must choose a lifetime mortgage that allows them these options from the outset, or they could face an early repayment fee to switch later on. A drawdown facility is when a lender agrees to a total maximum amount they will lend, and the borrower can choose to access this in instalments. Interest is only charged on each released instalment and not the total.
Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Equity release may not be suitable for every person, so seeking advice is crucial to ensure they know of all other options available to them. According to Key, less than 10% of consumers who enquire about equity release end up proceeding, and instead may decide to downsize, seek support from family or just decide it isn’t the right time.
“Whatever consumers decide on, it is imperative they compare all their options carefully and consider the impact on any inheritance for their family, for example whether the released funds should be taken as a lump sum or drawdown, and whether downsizing or a retirement interest-only mortgage (RIO) would be a more appropriate choice.”
Read more about how equity release works or find out what to expect when you receive equity release advice.