Rising house prices are a common topic of conversation. Bemoaned by many, they are welcomed by others. One particular group finding a new advantage in the increasing amounts of equity in their homes are those individuals approaching retirement without satisfactory pension pots. Reduced returns on pension investments have, in some ways, been the corollary of the booming housing market. And, as pension pots increasingly fail to live up even to modest expectations, many people are turning to their other major source of wealth: their homes.
Knowledge of equity release has increased significantly over the past decade, in line with the house prices rise, and as more and more homeowners investigate its benefits. Initially used very much as the option of last resort, it is now the turn of older homeowners, often sitting on very significant amounts of equity, to realise some of the value of their homes. Not only does equity release offer the chance to shore up what might otherwise be an inadequate or relatively frugal pension, it can also reduce the inheritance tax burden. Additionally, some people are using equity release to help children and grandchildren onto the property ladder rather sooner than might otherwise have been the case.
The figures speak for themselves: according to the Nationwide Building Society, although the average UK house price rose by 12.6% between 2014 and 2017, the average value of a property used for equity release increased by 26% over the same period. Many of these properties being used for equity release are those in the £500,000 bracket and above. In other words, they are the properties most likely to tip their owners over the inheritance tax threshold. Understandably, many such property owners would prefer that as much as possible of their home’s capital value benefited either themselves or their relatives. Equity release is one of very few ways of achieving this.
Recent pension reforms have lent further gloss to the attractions of equity release. With the so-called “death tax” on pensions being reduced from 55% to zero for those who die before the age of 75, there is a great incentive to leave pensions unspent and, instead, to tap into property value, which is still potentially subject to post-death taxation.
The three months between April and June 2016 saw over £700m being released from UK homes under equity release schemes. The 2017 figures are not yet confirmed, but early predictions suggest that, even allowing for a slowdown in property sale prices, in excess of £3bn may have been taken in new borrowing.
Although there are a variety of equity release schemes, most are restricted to those aged 55 and over, and all require interested homeowners to take independent regulated financial advice. This minimum age and the requirement to seek appropriate financial advice are important safeguards, helping to ensure those who go down this road understand what they are doing and do not risk exhausting much of the value of their home many decades before death. Some of the newer schemes even allow homeowners to make interest payments on the lump sum or income they receive from their home, thus minimising the final “rolled up” interest bill, which is payable only after death. This makes it easier to ensure that taking advantage of an equity release scheme does not have to mean leaving estate beneficiaries with little or no portion of the property’s value. In a similar vein, all equity release scheme members of the trade body the Equity Release Council provider the “no negative equity” guarantee. It is also possible to “ring-fence” a portion of the equity in a property to ensure that a minimum amount will be left to pass on under the owner’s will using something once missing from lifetime mortgages, which is the Inheritance Protection feature.
Often seen as natural companion of equity release schemes, rising house prices are likely to be behind some of the take-up of these schemes. For those contemplating equity release and watching the housing market with care, it is true that a stalling or falling housing market may take some of the shine off equity release. However, it is worth remembering that house prices, particularly of the highest valued properties, have a long way to drop before equity release becomes a non-starter. Moreover, the market may yet confound the expectations of more cautious commentators and see house prices rise at a level that continues to exceed inflation.