Equity release hit new high in 2021 as over-55s battled cost of living crisis 1

Equity release hit new high in 2021 as over-55s battled cost of living crisis

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Older homeowners tapped record amounts of cash from their homes last year, taking advantage of rising property prices to potentially help them cope with cost of living pressures.

They borrowed £4.8billion in equity release mortgages in 2021, an increase of 24 per cent compared to 2020, according to industry body the Equity Release Council. 

The typical equity release customer borrowed just under £125,000 in the final quarter of last year, a figure that was roughly the same whether they took a lump sum or decided to ‘draw down’ their money over time.

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Some homeowners are using equity release as a way to cope with increasing bills, but the market is also increasingly attracting wealthier customers with lifestyle aspirations

Some homeowners are using equity release as a way to cope with increasing bills, but the market is also increasingly attracting wealthier customers with lifestyle aspirations

The amount borrowed on a drawdown plan increased by 18 per cent annually, while on lump sum plans it increased by 20 per cent.

The Equity Release Council said this was because of rising property prices in the last year, which customers were using to help them cope with the rising cost of living.

However, it said it was also impacted to an extent by wealthier customers with higher-value homes increasingly being attracted to equity release.

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David Burrowes, chairman of the Equity Release Council, said: ‘Cost of living pressures are just one of many reasons why homeowners are choosing to cash in on years of wealth accumulated in their homes. 

‘Increasing loan sizes partly reflect the rise in house prices and a more affluent type of customer using lifetime mortgages to plan their finances or gift a living legacy to family members.

‘Equity release products have continued to evolve in recent years with new providers and features adding to their appeal.’ 

What is equity release? 

Equity release is one way that over-55s can benefit from increases in their homes' value

Equity release is one way that over-55s can benefit from increases in their homes’ value

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Equity release loans, also known as Lifetime Mortgages and Home Reversion Plans, allow homeowners aged 55 or over to access money tied up in their property tax-free.

Borrowers get a loan secured on their home, worth up to 60 per cent of its value, while still remaining the sole owner. They can use the money for anything they like.

If they still have a mortgage on their home when they take out the equity release loan, they must use the loan to pay off their mortgage in full.

The loan needs to be repaid, with interest, through the sale of their home once they have died or gone in to long-term care. 

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A total of 76,000 people used equity release last year, including those taking out now plans, drew down money from existing plans and agreeing further advances  - more than in 2020

A total of 76,000 people used equity release last year, including those taking out now plans, drew down money from existing plans and agreeing further advances  – more than in 2020

In total, 76,000 people used equity release last year, including both new and returning customers.

This was a 4 per cent per cent increase from 2020, when just under 73,000 customers either took out new equity release plans, made use of drawdown reserves or agreed extensions to existing plans.

However, it remains below the peak of 85,497 seen in 2019.

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Will Hale, chief executive of equity release adviser Key, said he anticipated more demand for equity release going forward, due to both the pressure of inflation and customers being disappointed by their income in retirement.

‘With customers having focusing on meeting pressing needs over the last 24 months, we anticipate that there will be pent up demand for discretionary spending amongst some over-55s who have found that their retirement is currently very different from what they anticipated,’ he said.

‘However, this is likely to be tempered by inflationary pressures and increasing numbers of customers seeking to boost their or their families spending power to meet rising household bills.’

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The 24 per cent growth in money borrowed was compared to 31 per cent in the mainstream mortgage market.

Just under 41,000 new equity release plans were taken out in 2021, an increase of only 2 per cent compared to 2020. The fact that overall borrowing spiked despite this again suggests that those who do borrow are taking larger sums.

This was below the levels recorded in 2018 (46,397) and 2019 (44,870).

In the final quarter of 2021, three in five of new customers opted for a draw down plan.

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The benefit of this is that customers often only pay interest on the amount they have drawn down, meaning that it mounts up less quickly.

While interest costs are still high on equity release plans compared to mainstream mortgages, they have come down significantly from the early days of equity release and can now be found with rates as low as 3 per cent in some cases.

Some plans also offer borrowers the opportunity to repay some of the balance or interest as they go, meaning compound interest will mount up less quickly.

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