Equity release is becoming an increasingly popular way of solving a dilemma many older people face. On the one hand, they want to stay in their own home for as long as possible. On the other hand, they went to access the value in their home and also reduce their estate’s exposure to inheritance tax.
2021 saw new highs in equity release
Whatever figure you look at, equity release reached new highs in 2021. Lending reached £4.4bn (up 28% on the previous year). A total of 41,991 new plans were issued (up 4% on the previous year). The average amount released was £104,792 (up 23% on the previous year).
The three main headline drivers for equity release are mortgage repayments, gifting and home improvements.
Using equity release for mortgage repayments is likely to be driven by a combination of two key factors. The first is that interest-only mortgages (on residential property) are still being flushed out of the financial system. Some of the current generation of retirees still have them and may not have the funds in place to pay off the principal.
This effectively leaves them with the choice of downsizing or using equity release. In many cases, equity release fulfils more of their life goals. It certainly tends to be less disruptive. What’s more, some equity release plans leave open the possibility of downsizing at a later date.
The second is that rampant inflation is particularly challenging for people on fixed incomes. This includes a lot of retirees. Some will have bought annuities before pensions freedoms were introduced in 2015. Others may have chosen to buy annuities for their simplicity. Others may be on defined-benefits pensions.
Even those who are making the most of pensions freedoms may be struggling to navigate their way through these turbulent waters. Using equity release to pay off a mortgage can give them welcome breathing space. It can also help with other goals such as estate planning.
In many cases, using equity release for gifting fulfils two goals. Firstly, the gifts are often used to help other people achieve key milestones. In fact, releasing equity from one home may provide the deposit somebody needs to buy another. Secondly, it reduces the value of the donor’s estate.
Even with the family home allowance, this can still be a huge benefit to homeowners. As the law currently stands, the family home allowance is worth £175K. Realistically, it seems highly unlikely that this will be increased any time soon. In fact, it’s not out of the question that it will be abolished (or at least suspended). Likewise, it’s also highly unlikely that the general nil-rate inheritance tax allowance will be increased any time soon.
House prices surged upwards during the stamp duty holiday. While this has now ended, it seems reasonable to assume that general inflation will have an effect on house prices. This means that homeowners who wish to stay in their own homes for as long as possible will need to take estate planning very seriously.
The whole point of home improvements is to add functionality to a home. In the case of older people, this may be to facilitate their ageing in place for as long as possible. It may also be to create extra usable space for example to accommodate “boomerang” children. It’s also possible that retirees are creating home offices so they can earn an income again.
Regardless of what the end goal is, equity release can be an astute way of financing it. It can provide an immediate injection of capital and add value to a home while minimising the liability to the homeowner’s estate.
For more information or to speak to an advisor regarding your personal situation, please contact us.
Your home is at risk if you do not keep up repayments on your mortgage