Should I Consider Downsizing Or Releasing Equity During The Cost Of Living Crisis?
[Podcast recorded in February 2023]. Equity release specialist, Mark Thompson, shares his thoughts on a recent report by the Financial Reporter. The research found that one in six of the over 50s plan to downsize or release equity during the cost of living crisis.
Does the survey reflect what you’re seeing at the moment?
I don’t really think you need a survey to tell you that people are struggling with the cost of living crisis. We can all feel it and see how it’s impacting on people.
But certainly, yes, I’m seeing this all the time – regardless of what’s happened recently. It all depends on how prepared people are prepared for their later life, with pension provision etc. People are at so many different stages of financial security. So it doesn’t surprise me that as high as one in six are thinking about moving or releasing equity.
In fact, I think it could be higher than that. Things aren’t getting better – they just seem to be getting worse right now.
Is downsizing or releasing equity the only options for the over 50s? Should people be doing this in the current climate?
It’s worth talking a bit more about downsizing. Earlier in my career, bearing in mind I’m sixty now, downsizing was somebody selling a house to get something smaller. That obviously releases money and saves costs.
The problem for a lot of people nowadays is that smaller properties, bungalows etc, are no longer cheaper. In some cases they’re actually more expensive. So you might be downsizing in terms of space, but not in terms of the actual cost.
The other problem is finding something. That’s been a challenge for a lot of people for the last few years – there’s a lack of supply. So whilst people might think they want to downsize to release money, they can’t find anything suitable in the locations that they want.
The other thing we’ve talked about before on these podcasts is whether it’s financially viable or a good thing to downsize and release money from a house. A survey a few months ago from a major lender found that people that had downsized 15 years ago or so were actually worse off than those who had held onto their houses and taken equity release.
If you think about it, your house is your main financial investment. So by downsizing, you reduce your level of investment in the market. People that have held onto their houses have seen a lot of growth and are financially better off. That does depend on what house prices do, of course.
And finally, in a lot of cases, people don’t want to downsize. The main reason people come to me for equity release is that they don’t want to move. They want to stay in their home. And a lifetime mortgage or equity release is certainly one method of allowing them to retain their property for as long as they want to.
In a news story this week, the government is encouraging the over 50s back to work – how does that fit with downsizing and equity release?
When I talk to a client, they don’t just come to me and ask for equity release. They want to understand their options. We do a full financial assessment of their means before we even can advise on what might be right for them.
One thing I find with lots of clients is that they’re property rich, but cash poor. They haven’t provided in their early years for the later years. I’ve got lots of friends who’ve run their own businesses, and while they were working they were doing very well, but a lot of self-employed people haven’t set aside enough for their pensions in later life.
So they have enjoyed a good standard of living for a number of years, but all of a sudden they are finding it very tricky now they have retired and their income has stopped.
Everybody’s different and you’ve got to look at over’s situation individually. But a lot of people don’t have enough pension provisioning. As soon as the cost of living goes up, like what’s happening now, what do you do? You either go back to work and create a little bit of income, or you move, or you try and release money out of your existing property in one form or another.
There must be a lot of discussions going on across the country about how people are going to survive. I feel for them, I really do.
What would you say to somebody listening to this if they are in their 20s or 30s?
As I say to all clients, what’s your exit plan? I remember an advisor saying that to me years ago. I didn’t know what he was talking about, but it’s important.
What are you going to do when you get to retirement? How are you going to live? I met somebody the other day, an architect who was earning well – and he had five or six pensions set up over the years. I asked him about the total value of his fund and he looked at me quizzically.
He added it up and I had to suggest that he speak to a pension advisor as soon as possible, as in my opinion he didn’t have enough to support his lifestyle at retirement. You do need an awful lot of money in a pension fund to support you. He’s speaking to an advisor as we speak.
So people think they’ve got a provision, but in reality what will their money be worth when they come to need it? It can be a very salutary experience hearing how much they’re going to need to live on – which is why people are coming to me for lifetime mortgages, because obviously they haven’t got that provision.
Are more people coming to you now, during this cost of living crisis?
I can’t say they are, because I’ve been seeing this regularly for a long time. The cost of living crisis is just going to sharpen people’s focus.
What I have noticed is more over 50s starting to separate. That may be a symptom of this – there’s the old saying, ‘debt comes in the door, love flies out of the window.’ When people start to suffer financially, so do their relationships.
There’s always been a steady stream of people that need financial assistance via equity release or later life borrowing in some form. But I think it’s going to get worse. I don’t think we’ve seen the full effect of it yet. It’s too early for us to have seen the floodgates open but in my experience, having worked in finance and property all my life, I don’t think it’s going to be long before it looks a lot worse.
What lending options are available to older borrowers? How can an equity release advisor like yourself help?
I ask so many people about their pension and what happens if one of them dies, and they won’t know. A fact find with a client normally lasts an hour to two hours. I ask a lot of questions and then usually they go away to find the answers. Once we know their current situation, we can then establish what options might be available to them.
Invariably when people get to me, they’ve already been referred by another advisor who’s tried to get them a standard mortgage. The main thing lenders want to know is how long you want a mortgage for and if you can afford to pay it back. It’s all based on your income and affordability.
Most mortgages are for 25 years, so they want to know that you can afford that mortgage for that term. If you’re 70 years old and you go for a normal mortgage, you could be 90 by the time it ends. Will you have enough income to support that? Usually the answer is no – you’ll be on a pension and won’t be earning a salary. People discover that they can’t afford a standard mortgage. So they start to look at other options.
Some providers will let people take standard mortgages well into retirement but they still have to be affordable. A lifetime mortgage is not based on your income. You don’t have to make any payments – you can, but you don’t have to, so it doesn’t matter whether you’re earning or not.
Plus, the mortgage only ends once you die or go into long-term care. With a normal mortgage, at a certain point you’ve got to pay it back if you haven’t already. A lifetime mortgage gives people that flexibility.
There are retirement interest only mortgages where you only pay the interest rather than the capital plus interest. But again that requires you to be earning enough money to make those payments, otherwise your home is at risk. With a lifetime mortgage your home is NOT at risk. It can’t be a lifetime mortgage if you have to make payments.
So there’s no quick answer to your question. It’s about understanding the customer, looking at their finances and discussing what they wish to do, what their preferences are and then pointing them in the right direction.
A customer might decide equity release isn’t right for them and they’ll go off in another direction. There are options, but it depends on what you’re earning and how long you want the term to be. Of course, the shorter the term, the more expensive the repayments are. If you borrow £10,000 over 10 years it’s a lot cheaper than over 30 years. But you have to be able to afford the payments.
That’s where people end up talking to an equity release advisor because in a lot of cases, they can’t afford the payments. They’ve researched every mortgage, it’s not affordable, so they want to know what else they can do to avoid selling their home.
What other thoughts do you have on this research on downsizing and equity release during the cost of living crisis?
One thing that people don’t always realise is that you don’t have to do equity release on the house you’re living in. Somebody might come to me wanting to downsize but they think they can’t afford to do it. The area they want might be too expensive. But actually, you can do equity release on the property you want to buy.
Most people are quite shocked to hear that. They didn’t realise that’s an option. And it opens up a whole new world – it can be the difference between having to just put up with a property for the rest of your life or get the one you really want.
The survey is suggesting that people are in trouble. The problem with everything going up is that it never goes back down to what it was. Food, energy, mortgages – will they ever be as cheap as they were. Not in my experience. That’s going to erode the savings of an awful lot of people. It takes a lot of years of financial preparation to make sure you’re not at the mercy of things like this.
When I joined my first company my father told me to get on the company pension scheme and I did – I had 30 plus years paying into the company pension. Best advice I ever got.
A lot of my colleagues at the same business hadn’t done that. I’d speak to people in quite high positions who only started to do it later on in life. Like anything, it’s amazing how it can build up if you start earlier in life. So if you haven’t sorted your pension out. Make sure you do that.
I actually get lots of financial advisors asking me questions. Most of my leads come from advisers with clients who they can’t help. They want to know if equity release is a good option. I’m not saying it’s a last resort but in many cases, it is.
If you can afford to make payments or you can sustain a loan, then that’s an option too. But for many people equity release is the only solution. It’s our job to explore all the avenues so you can make the decision that’s right for you.
A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action. If you are considering releasing equity from your home, you should consider all options available before equity release.
The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution. As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.
Although the final decision is yours, you are encouraged to discuss your plans with your family and beneficiaries, as a Lifetime Mortgage could have an impact on any potential inheritance. We would also encourage you to invite them to join any meetings with your Financial Adviser so they can ask questions and join in the decision, as we believe it is better to discuss your decision with them before you go ahead. This is a referral service.