Housing wealth amongst the over 55’s has grown. In London and the South East in particular, house price rises have helped homeowners to accumulate large chunks of equity. The over 65s have an estimated £1.6 trillion of equity in their homes. For some people approaching or in retirement, there will now be more wealth in their home than in their pension pot.
This increase in housing wealth seems to have changed people’s views on later life borrowing. Data from the Office for National Statistics shows that people regard property as second only to their workplace pensions as the safest way to save for retirement. Lifetime mortgages are no longer seen as a last resort option, but as a legitimate way of funding retirement.
Property wealth conversations are becoming more common in retirement planning. They are no longer limited to clients who are downsizing, or buy-to-let landlords. Lifetime mortgages are a way to release equity and could help fund their retirement goals. For some, these goals are not only personal – but for their families too.
A lifetime mortgage is a loan secured on a client’s home. If the client gifts money, the recipient may have to pay inheritance tax in the future. There may be cheaper ways to borrow money.
Why are families important?
Families are often a big part of the client’s motivation for taking a lifetime mortgage. They can also be a major influencer if they have any concerns about taking the step to release equity. For many clients, taking a lifetime mortgage will enable them to do some of the things they’ve always wanted. Whether that’s exotic holidays, home improvements or lunches with friends.
For others, a major driver in making that decision will be the potential to help their families. Clients could use the money released from their home to:
• Help raise the deposit for a grandchild to buy their first home.
• Enable a couple to stay living together by paying for home adaptations or care.
• Support a separating couple in a divorce settlement.
• Boost a grandparent’s income so that they can afford to visit relatives living abroad.
Myths and the influence of family members
We’ve come a long way from the equity release products of the 1980’s. In 1991, major providers of Safe Home Income Plans (SHIP) came together to produce a new Code of Practice. SHIP would later relaunch as the Equity Release Council. The Equity Release Council has overseen changes that have tightened controls, increased consumer protections and enabled the industry to grow responsibly.
Probably the most significant of these changes was the introduction of the “no negative equity guarantee”. This product feature effectively guaranteed that families would never end up owing lenders money after the homeowner died. It gave protection to families who had previously risked being stuck with a bill if the property value did not cover the outstanding loan.
This innovation, combined with increased competition in the market, has meant a better deal than ever for consumers. Interest rates are much lower than in the 1980’s and product developments have given homeowners greater flexibility in repaying the loan or managing the interest payments.
These improvements have undoubtedly contributed to the market’s growth. In 2018, lending increased to £3.94 billion.
Yet research shows that some negative perceptions and myths about equity release prevail.
Lenders will need to continue to work with advisers to promote the varied benefits offered by lifetime mortgages. Families could be brought closer, made financially stronger and achieve goals that would otherwise remain out of reach. Part of this task will be tackling the myths that can often create resistance to that opportunity.