Mortgages Tips

‘Cocktail of dangers’ for older homeowners using equity release to help struggling families


Older homeowners who want to pass wealth on to their struggling children and grandchildren may be sleepwalking into costly equity release plans that will make them poorer in the long run.

Millions of working people have seen their finances deteriorate since the coronavirus outbreak began. Many will have retired parents and grandparents who are eager to help them, but older homeowners who do so by using equity release plans to free up cash from their property face a cocktail of dangers: higher interest rates, falling house prices and limited opportunities to discuss any decision with their family.

There are many potential reasons to release cash from a property, generally the most valuable asset people own. As well as helping their family through the crisis, older people may be facing a financial crunch of their own as investment income from dividends has dried up.

While use of equity release slowed at the start of the pandemic, interest has risen sharply since the housing market reopened last week.

Paula Steele, of John Lamb Financial Solutions, an advisory firm, said: “We’ve seen a surge in inquiries about equity release as people have been forced to reconsider their funding options. Savers have little choice but to look at all their assets to unlock much-needed capital and can no longer exclude what is probably their largest asset, their home.”

However, since the crisis began, equity release interest rates have risen and the choice of schemes available to customers has fallen.

Data published by Moneyfacts, a financial analyst, show that the average interest rate charged is now 4.34pc, higher than the March figure of 4.2pc. The number of plans has fallen from 406 to 357 in the past two months.

The compounded way in which interest is charged on equity release loans means that debts mount much more quickly than on a traditional mortgage. Higher interest rates can have a devastating impact, as the owner’s stake in the property is whittled away faster. Falling house prices have a similar effect and could leave older people with little to pass on to their children when they die.

The outlook for the property market is bleak. The Bank of England has forecast a 16pc drop in house prices, while Deutsche Bank’s estimate was as much as 23pc. This would make the true cost of equity release much higher.

Andy Wilson, of Andy Wilson Financial Services, an equity release adviser, said: “The release of money will cost more after the crisis if interest rates continue to rise, as they have now started to do.”

The attraction of equity release is that it allows homeowners to free up cash without the need to sell their home. It is only when they die or move into long-term care that the property is sold and the equity release lender takes the amount owed, plus the interest that has accrued. The remainder is left for the borrower’s beneficiaries, but if the property’s value has fallen there could be little to pass on.

Jim Boyd, of the Equity Release Council, the trade body, said all new plans had a “no negative equity” guarantee, so the borrower would never owe more than the value of the property.

“The potential for positive or negative changes in house values is a key point that is considered with all customers during the advice process,” he added.

However, Telegraph Money has reported cases in which families were left with little to share after parents had signed up to expensive plans. There are concerns that older homeowners may now be entering into agreements without consulting their family properly because they have no physical contact.

The Equity Release Council said new guidelines for the property market stated that advisers could now visit older homeowners, subject to social distancing rules. However, lockdown rules bar family members from doing so.

Dean Buckner, an equity release expert who used to work for the Bank of England, said: “I worry that people who take out equity release to help children or grandchildren out of difficulties caused by the crisis may be damaging their own financial position in the longer term.”

Mr Boyd added: “The equity release industry is attuned to dealing with potentially vulnerable customers, with robust industry standards and consumer protections.”


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