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Equity Release Changes

Equity Release Has Become Mainstream – What’s Changed?

 

With the value of cash being released from homes passing £3bn a year for the first time, equity release has cemented its place in the mainstream of financial planning. These plans – which let you take withdrawals from properties – have been regulated since 2004.
Financial advisers, who must be consulted before entering an equity release arrangement, but the booming housing market over the past decade coupled with falling interest rates and inheritance tax perks have opened up the market to the middle classes. The number of £500,000- plus properties used for equity release has risen sharply in recent years. The average sum withdrawn is now around £75,000. Most providers are members of the Equity Release Council, a condition of which is to offer a “no negative equity” guarantee. This has also helped ease concern for those who remember “home income” plans sold in the Eighties and Nineties, where variable interest rates and little protection against sudden falls in house prices left elderly customers exposed.

 

 

What’s changed?

In 2017 a record £3.06bn was extracted from properties, according to the Equity Release Council. That represents a £909m rise on 2016’s total, and a trebling in the total amount lent over the past four years. Typically, borrowers allow equity release loans to “roll up”, meaning interest is added to the loan which is paid off on the sale of the property, normally on death. Interest rates apply for the entirety of the loan, and remortgaging is rare, so even a small increase in rates can have an enormous effect in the final loan size. As with conventional mortgages and savings accounts, interest rates have fallen steadily over the past few years. New options: guard against inheritance tax or dodge early repayment charges Equity release providers have added a growing list of features to their products as the market has developed. More firms now offer the ability to keep loan sizes under control by allowing regular or ad-hoc payments, just as you might when overpaying a conventional mortgage. Where this option is chosen, lenders will allow borrowers to convert to roll-up if they can no longer afford repayments. Around half of all equity release plans currently on the market allow “drawdown”, where money is drip released, rather than in a single lump. Likewise, half of today’s products offer an “inheritance guarantee”, allowing borrowers to ring-fence a proportion of housing wealth to pass onto the next generation. Using this option cuts the amount you can release as cash, but means a pre-determined amount is set aside no matter the eventual size of the loan. About four in ten products include protections in case you decide to downsize to a lower value property. This means borrowers do not pay an early repayment charge, which would otherwise apply. There is normally a five year qualifying period.

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