This week Craig is joined by Equity Specialist and regular guest, Mark Thompson to discuss how people are using equity release more often to fund their everyday living.
Are more people using equity release to fund everyday living?
Yes, it’s certainly more prevalent now for people to use their equity to fund day to day living, rather than for luxury holidays and home improvements. Unfortunately, some people do need to take it to make ends meet.
People often release equity in their homes because they don’t have enough set aside for retirement. There are no longer the high-value final salary pension schemes, plus people are living longer. It’s fairly common for us to meet clients who are living hand-to-mouth – they’re surviving on their pension but have nothing set aside in case the boiler goes, or for a holiday or a treat.
Can inflation have a negative effect too?
You can have £100,000 in the bank today, but how much will it really be worth in ten years’ time? That’s a big discussion we have with our clients – to make sure they are aware of how inflation can erode savings and reduce the true value of your money.
Equity release allows the option of a drawdown facility, or an income plan where you might take a lump sum, and have the option to take more in the future. You could also take a set amount each month to top up your income. This often seems more manageable and less daunting than a big lump sum.
Plus, if you take the money up front, you’re paying the interest on that money from day one. With a facility or draw down facility, you’re paying less interest. It’s something we always explore with our clients. It’s really important to understand what you want the money for, so we can establish the best way to access it.
Are there other advantages to a drawdown facility?
One of the key benefits is that you can set the interest rate up front and it won’t increase. And it doesn’t matter if you then choose not to use the facility – many people don’t. But this approach gives you both flexibility and peace of mind. It means you can access more money at a sensible interest rate in the future, should you need it.
Are people using equity release as a back-up pension income?
In our experience, the younger generation certainly see equity release as an important option for the future. They’re having to save hard for a property deposit, and perhaps not paying enough into their pension.
Many people now see their property as the route to fund their retirement – and some are investing in Buy to Let property as an alternative to a pension. There are lots of ways to plan for the future, and this is certainly an option.
Can I gift money to my children with equity release?
Yes, many people use equity release to pass money to their families – and often it’s to help them get on the property ladder. You’re releasing money from your home to help children and grandchildren buy themselves a flat or house. And that in turn can help them release equity one day in the future, if they need to.
How many people decide to use equity release to fund day to day living?
In fact, we don’t get that many enquiries initially about funding everyday life. It often comes out as we look into someone’s situation. They want equity release for a certain purpose, but our conversation reveals that their income is tight.
So I wouldn’t say it’s a primary reason, although I believe that will change. People are definitely becoming more aware that you can use your home as a source of money later in life.
Another common reason for people to use equity release is to allow them to stay in the same home without the upheaval of downsizing to release that money.
How much could I access on equity release and how does it work?
The maximum amount you can take with equity release is based upon your age. You can access equity release from the age of 55, but it actually helps if you are a bit older. Because the life expectancy is lower, you can usually borrow more.
A client of 70 years old can borrow around 43% of the value of their property. There are usually minimum values of the property involved.
Looking at it very simply, if we’ve got a £100,000 house and I can borrow £43,000 as a maximum. I might borrow that amount all in one go. Or, I can take a lump sum and then leave the rest with a drawdown facility. So I might take a £30,000 lump sum and then have another £13,000 in drawdown.
But there are many options and different deals – we will explore the right one to match each client. It’s a competitive market today, which means it’s better for the customer as there is better choice and more flexibility.
How can we decide on the best approach?
That’s all part of the service from a broker. We’re here to help you explore all the options and make sure you get a product that works for you.
I spent two hours with a couple this week – talking about the different ways they could achieve their aim. We did various forecasts, with visible graph illustrations: if you take a lump sum now, this is what it will cost in interest over the years. Then we compared that with a drawdown option and what that means for their equity.
We’re here for advice and recommendation and we want to find the right solution for you.
Is it a long process?
It doesn’t have to be, but these are important decisions that shouldn’t be rushed. We often suggest that clients get their families involved, so that everyone understands how the process will work and why it’s a good idea.
But it can be a quick process if you want it to be. We make sure the speed of the process is right for the client and their needs.
Sometimes there are things to find out – for example, if one of the couple dies, will the other continue to receive that person’s pension? Or will that income stop? These things shouldn’t be done in a rush – it’s important to consider the big picture and make sure that everyone understands the details.