The UK’s ageing population is increasingly turning to equity release mortgages to help ease its financial pressures.
Equity release mortgages enable homeowners to borrow against the value of their home without having to make monthly repayments. Interest is rolled over and repaid, usually on the death of the borrower or when they move into long-term care.
According to figures published by the Equity Release Council back in April, equity release lending grew by 34% between 2015 and 2016. A record £1.24 billion of equity was unlocked in the second half of 2016, making it the fastest growing sector of the mortgage market.
While Aviva traditionally dominated the market, a number of new entrants are seeking to challenge this dominance. Legal & General, Santander and Nationwide are all relatively institutions to enter the market, bringing with them increasingly competitive rates.
With rocketing house prices, borrowers are now able to take advantage of an equity release mortgage to help finance any indebtedness, as well as help with everyday expenditure.
Lifetime mortgages are the most popular form of equity release with the loan and the interest owed being repaid when the borrower moves into long-term care.
Nigel Waterson, chairman of the Equity Release Council, noted that: “The sector is becoming increasingly mainstream amid growing appetite from older homeowners, reflected by the fact that lifetime products were the fastest growing segment of the mortgage market last year.”
He added: “Older homeowners are increasingly realising that there are a number of potential uses for their housing wealth beyond supplementing their retirement income, including re-investing in their homes and helping younger family members by providing a living inheritance.”
Increased competition in the equity release market, in addition to low base rates, have meant that equity release borrowing is now cheaper than it was five years ago, according to Key Retirement.
Published in May, Key Retirement’s UK Equity Release Market Monitor for Q1 of 2017 showed that retired homeowners cashed in £1.25 billion of property wealth in the first half of 2017 at a rate of £6.9 million a day.
The report found that the average pensioner took £70,625 from their home; helping to fund home improvements, family members and other debts, including mortgages and credit cards.
Rates on equity release schemes vary depending on a number of factors, including whether a part of the property is protected as a guaranteed inheritance and whether it is possible to pay off part of the loan during its lifetime.
In addition to the better deals being offered to borrowers, some commentators are also pointing towards the many interest-only mortgages taken out around the millennium. While many interest-only mortgages were sold with an endowment policy designed to repay the capital once it had matured, many such policies are worth less than expected, leaving borrowers with a large lump sum capital repayment.
According to the Council of Mortgage Lenders, approximately a fifth of all outstanding residential mortgages in the UK are interest-only, leaving a significant number of people in challenging financial positions.
As a result, some believe that equity release mortgages could be a solution to this potential “ticking time bomb”. Despite this optimism however, it remains to be seen whether such products can serve as the comprehensive solution many are hoping for.