Mark Thompson, equity release specialist, joins Craig on the Mortgages, Money & More podcast to discuss some new trends in the equity release space.
There’s positive news at the moment about how wealth for the over 65s has increased, particularly in the last six months.
Property prices have increased because of stamp duty holidays and other government measures to steady the housing market. While stamp duty holidays have finished, property wealth is strong, especially compared with pensions and investments.
How much have property prices increased?
Property for over 65s has increased in value by over £24 billion in the last six months – a staggering figure.
These statistics are from a report commissioned by one of the major equity release players, which found that the average older homeowner is nearly £4,800 richer today than they were six months ago.
UK property wealth now stands at £1.256 trillion for people over the age of 65. So there’s a lot of wealth tied up in property in this country! Property wealth is fundamentally the biggest investment or asset that most people have – larger than their pensions or investments.
Do people recognise how important property is as an investment?
An interesting aspect is that it’s optional to invest in a pension or set up investments. But you have to pay your mortgage. You see it as a debt rather than an investment, because you’re forced to do it to keep the roof over your head.
An example is a client who wanted to buy a home with his girlfriend. He already had a property that he was renting out and wanted to sell it and buy a new property. So I suggested that we work out how much money he had made on the rental property. He’d had it for about two years, had made thousands both in the rent and through house price rises. He could afford to have two properties, but hadn’t recognised the value of his property investment.
And that’s why people need advice before making big decisions. Property prices do come down, but in the main, they increase in the long term. Why sell something that acts like a cash machine generating several hundred pounds every month?
How does the property value increase compare with pension growth?
The average pension income hasn’t climbed as much as property prices. There’s various reasons for the investment market not giving people such a good return right now – and the fuel crisis has not helped.
Government data shows that the average pension income after housing costs has only risen by £12 to £331 a week, which is the equivalent of 3.7% over the last 11 years.
Meanwhile in the same time period, homeowners have seen a 61% growth in the value of their home.
Another thing is that equity release and lifetime mortgage rates are exceedingly low in the main. I’ve got clients now with products at 2.8%, 3.0% 3.2%… The rates depend on how much you’re borrowing against the value of your property.
The risk that these providers are taking is quite high, too, because you could live for 30 years, with the interest rolling up – and the lenders guarantee that you can never owe more than the house is worth. But as prices are rising, people gain more equity which reduces the risk to the lender.
Are people switching away from older equity release products?
Clients that took equity release a number of years ago can see that there are much better rates available today. To many of them, it doesn’t matter, as they won’t be paying the debt back – it’s paid by selling the house after they pass away.
However, the rates can have a huge impact on your estate. If I took out an equity release product six or seven years ago at 4.8% interest, the impact on that over a period of 10 or 15 years could be massive.
Clients will always be better off to pay one mortgage off and take another out. With a lifetime mortgage, you can pay off the mortgage at any stage. You might not be better off in terms of payments – because you’re not making any – but for your beneficiaries, for your estate, there could be huge benefits in doing that.
As we know, there are penalties with paying off a fixed rate mortgage early – and the same applies with equity release. But say the early repayment charge is £3,000 and you owe £50,000 on your home, you will still be better off to borrow £53,000 from another lender at a more competitive rate. Your children, grandchildren and other beneficiaries will definitely see the benefit.
Do you suggest remortgaging to equity release clients?
We do go back to clients. We make sure that it’s in people’s minds as something to look at. We review to check they’re on the best possible deal at a particular time.
Just a small amount of interest can make a massive difference. There are still negative stories coming out of the woodwork, where somebody’s father borrowed £15,000 and now owes £60,000. But I can’t imagine any of my clients having a loan compound four times over.
At some stage someone should have gone back to that man and explained that they should change this deal. That just doesn’t seem right to me. I can’t imagine having that situation existing.
It’s important for people to recognise that their main capital investment is their property, and there’s a big opportunity to recover some of that investment without selling it.
You can keep the investment and its value can keep on rising. You should have a regular review of any equity release product – at least every two to three years.
A deal you did a few years ago might be well overshadowed now by today’s higher house price, meaning you don’t owe as much. A new loan would have a much lower Loan to Value and save you more money over the coming years.