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Equity release: What it means to unlock your property wealth
In any social gathering, there is one topic of conversation that is never far from the surface and that’s house prices.
Understandably so in early 2022, when data from various indices points to a property market that continues to reach new heights. In April, for example, the Rightmove House Price Index revealed that the average price of a property coming to market hit a record high for the third consecutive month, registering a figure of just over £360,000.
To put this number in context, it represents a rise of 10% on the previous year and is more than £50,000 above the level recorded in March 2020, just before the pandemic triggered lockdown across the UK.
For homeowners, the buoyancy of the property market can provide some comfort in the face of current pressures on the cost of living, and particularly for those whose financial plans might have been impacted negatively by Covid-19 or other unforeseen circumstances. This goes some way to explaining the recent rise in levels of equity release, with an increasing number of people seeking to unlock some of the value built up in their home.
Figures from the Equity Release Council show that record amounts of property wealth were accessed via equity release products across 2021, with the value of equity released breaking the £4bn barrier for the first time to end on £4.4bn worth of new lending in the 12-month period. The average equity release customer withdrew £125,000 as a single lump-sum or via incremental ‘drawdowns’, which the Equity Release Council has equated to more than seven years of typical net income for a single pensioner or nearly four years for a couple.
This momentum continued into 2022, with the number of equity release customers reaching a new quarterly high between January and March 2022, when lending was up 14% quarter-on-quarter to £1.53bn.
Realising your property asset
Equity release is only available to homeowners aged 55 and over and is based on them receiving a tax-free lump sum or regular income from an equity release product, which is typically a lifetime mortgage secured against the value of the home. They will continue to live in the property and their status as owner does not change.
In the case of a lifetime mortgage, the loan and interest are repaid by your estate when the remaining borrower living in the home either dies or moves into permanent long-term care. There are no requirements to make monthly repayments, although this may be an option on some plans to enable homeowners to reduce overall borrowing levels.
There are many reasons why people in later life will turn to equity release. For some it will provide a vehicle to rebalance debts and strengthen their financial position. For others it will provide a way to fund spending plans or facilitate financial support for family or loved ones.
In the context of escalating house prices, equity release can enable parents to share their property market gains with their children. Research suggests that one in five plans was used with this in mind in 2021, with an average of £58,734 being passed down to those in younger generations aiming to grasp the rising property ladder.
Making sure you’re fully informed
On this basis, it’s easy to see the appeal of equity release. It’s important to point out, however, that it will not be right for everyone, and that there are clear implications associated with this route – most notably the fact that accessing equity during your lifetime has the potential to diminish the value of your legacy wealth, which might have implications for inheritance planning.
The Financial Conduct Authority (FCA) has recently underlined the importance of potential customers being fully informed and supported on their equity release journey. The industry has also implemented several safeguards to help ensure that homeowners are equipped with all the necessary facts ahead of committing to equity release, with the aim of ensuring they make a well-considered and confident decision.
Members of the Equity Release Council (ERC), for example, make it a mandatory requirement for customers to have at least one in-person meeting with a solicitor before taking out a plan. ERC member products also incorporate a “no negative-equity guarantee”, which means that the amount owed by your estate will never be above the level of the property’s value when it is sold.
Even with protective measures such as these, such a significant decision should never be made without sourcing expert advice. This should be tailored to your specific individual circumstances to bring certainty that if you do choose equity release, it’s the right decision for you.
Borrowing money against the value of your home reduces the value of your estate and the tax due. To understand the features, costs and risks of a lifetime mortgage, contact us for a personalised illustration.
You may be subject to early-repayment charges if you want to exit the deal or pay the loan off early unless you pass away or move into care.
The information contained within this communication does not constitute financial advice, medical advice or other and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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