Homes in London are known for being extremely expensive, but this year house prices have shown signs of slowing down. This doesn’t mean that the houses are now affordable, but it is likely they will be more affordable in the future - and that isn’t all. Senior homeowners in London have started to unlock large amounts of money that have been tied up in their homes using equity release schemes.
An equity release scheme gives homeowners the chance to access the money that is locked up in their property without having to actually sell their home. This means that homeowners have the money to start businesses, buy second homes, go on holiday or simply create a nest egg for retirement, and all without having to leave their property.
While house prices in London may be starting to slow down, the average house price is still much higher than in other areas of the country. In fact, during the last five years, Londoners have watched house prices rise by a whopping 56%, which means that thousands of Londoners have their wealth tied up in their home. This isn’t ideal if a homeowner needs money, but they can’t sell their house (or maybe they simply don’t want to), but choosing to release equity means that homeowners can access their wealth without moving out.
This is very useful, especially when you consider that the average house in London costs around £904,000, as it means that most London homeowners have vast amounts of money tied up in their property. Whether they wish to release this for themselves or retain this for inheritance purposes is the main question that needs to be asked between the family, before the road to equity release starts.
Nevertheless, we are seeing a trend in London equity release where more gifting is evident, maybe for reasons other than just assisting family members. As an advisory firm at Equity Release Supermarket we have seen that more wealth is now being gifted in the south than anywhere else in the UK.
Mitigating inheritance tax maybe the reason for this increase and assuming the homeowner gifting the money lives the 7-year tapering relief period, then no further tax liability should arise. Additionally, gifting to children, even grandchildren to assist them onto the property ladder is commonplace in 2017. With the gulf between income multiples required to get a mortgage and the income to property value ratio currently, we expect this trend to continue into 2018.
How much money are the homeowners getting?
Research has found that homeowners who release equity around London tend to gain around £219,221, which is fairly high compared to other regions in the UK, where an average of £62,000 exists. These figures are based on the fact that the amount that can be released using a lifetime mortgage, is based on the age of the youngest homeowner & the property value. Essentially, the younger the applicant (plans start age 55) the less they can release, due to their potential longevity being longer than someone much older.
For instance, the maximum release for a healthy individual aged 55 on a lifetime mortgage currently is 25.5% of the property value, which based on the average property value in London would be a maximum equity release of £230,520. However, for a homeowner age 80 living in the same property value in London could release upto 52%, equating to a maximum release of £470,080.
How lenders view London equity release
The main reason for the increasing popularity of equity release schemes lie in the features of these schemes themselves. Here we are seeing falling lifetime mortgage interest rates and new flexible repayment features such as interest only and voluntary repayment options. Now, rather than traditional roll-up, we are seeing equity releasers being able to manage their plans & adjust the balance according to what inheritance they wish to leave for their heirs.
Complement all this with the topical situation of the interest-only time-bomb, where homeowners over the age of 55 are needing to settle interest only mortgages with no form of repayment vehicle in place. This extends homeowner rationale for the increase in uptake in London equity release.
This could mean that now is the perfect time to release the money from your home - especially if you own an expensive property in London. However, lenders are now starting to adjust their lifetime mortgage plans to accommodate the potential upside and downside of the London property scene.
Here we are seeing two of the largest lenders offering slightly different terms on their plans for those of a certain postcode, or property type in and outside the London Boroughs.
For instance, Legal & General Home Finance differentiate interest rate on the grounds of a north/south divide. Given the greater inherent risk to their portfolio with properties in London, they now apply a slightly higher interest rate to plans of a certain postcode in southern regions.
More obscure, but adopting the same practices are Aviva Equity Release. Aviva now individually underwrite each property based on postcode and even use the Environment Agency’s data to establish flood risk & therefore acceptability of any application.
Is this a good or bad thing, or is it creating a 2-tier system of equity release underwriting? Opinions are varied, but should you be in a southern flood zone, I’m sure it won’t be a positive answer!