There have been criticisms of equity-release schemes in the media, including Which? magazine, and this article is intended to respond to those criticisms and to dispel some of the widely held myths about equity release.
First, there are two types of equity release. The first is where you sell your property or part of it. This is known as a reversionary scheme. The second is where you borrow against your property either for a lump sum or for the payment of a monthly income. This is an equity-release mortgage scheme.
If you are aged over 60, in some cases 55, and own your own property then you should be able to release equity from your property.
For example, if your house is worth £100,000, then depending on your age, you can “borrow” up to 25 per cent of the value of your property, namely £25,000. Unlike a typical high-street mortgage, you do not have to repay anything to the company each month.
The money only becomes repayable on your death or if you have to go into care. If you are married, repayment is due on the death of your surviving partner or when the survivor goes into a home.
Interest is payable on the monies you borrow. At present some the most competitive interest rates for equity-release schemes are around 5.8 per cent. Interest rates tend to be variable but, unlike average high-street mortgages, the interest rate is often capped for the whole life of the mortgage.
The main criticism of equity-release relates to the interest rate that is charged. It is not only higher than you would get from a high-street bank or building society but it accumulates compound interest. This means that the interest earned is added on to the initial amount that is borrowed and then interest is continually charged on the loan plus rolled-up interest.
For example, if you borrowed £25,000 at a rate of 5.8 per cent each year, after 15 years the amount to repay would be £58,240.
This means, of course, as readily pointed out by critics, that the amount you are able to leave to your family would be greatly reduced.
However, if house prices increased at, say, 4.5 per cent per year – just over half of the national average of the last 30 years – over the 15 years, then the £100,000 house would be worth £193,500, offsetting entirely the increase in the amount to repay.
In addition, critics of equity release overlook the fact that borrowers are guaranteed security of occupation in their property.
They also have the benefit of releasing money from their property now to do those things which they may not be able to do in 10-15 years time.
Additionally, companies offering equity release encourage potential customers to discuss the scheme with their family to avoid disappointment later.
The interest rate is higher but the majority of people who enter into equity-release schemes no longer work and would be unable to obtain a typical mortgage from the bank or building society.
Interest does compound but property prices will hopefully continue to rise, thereby cancelling out part of the reduction in the size of estates due to the equity-release loan.
Additionally, interest rates are capped. Think back to the 1980s when interest rates were well into double figures. If that were to happen again, then those people whose interest rates were capped would be doing very well. We are, at present, in a period of unusually low interest rates.
The companies which lend money on equity-release schemes do not know when their loan will be repaid. It could be anything from one to 30 years or more. They are taking a gamble that house prices will remain high and stable. If house prices should fall then they could find that the property does not cover the amount to be repaid.
In this scenario, the companies will only take the house in full and final settlement but this would happen only on the customer's death or on entering a care home. Equity-release schemes will not take customers' savings, nor will they look to a customer's family for the shortfall.
Admittedly, equity release is certainly not always a first option but it can be an answer to a client's financial shortcomings in later life, either to provide them with an extra monthly income or to provide a lump sum for a holiday or car. Provided that proper legal advice is also sought, equity release is not always to be seen as the villain of the financial world.