Retirees and Equity Release
Posted by jdavis on October 27, 2014
According to the Equity Release Council (the trade body) more than £375Millions was borrowed in the last full quarter via Equity Release (ER).
The average amount borrowed between July and September was £67,467, the data showed, itself a record.
In total, 5,565 people took equity release, the largest number for 6 years, taking the total to 15,624 for 2014. Retirees borrowed 32% more in this way than in 2013.
Tens of thousands of retirees are resorting to using their homes as “cash machines” as they struggle to fund retirement plans and pay care bills in old age.
Pensioners in their 60s and 70s in particular were turning to equity release, an expensive type of borrowing which typically lasts for life.
Some pensioners were borrowing against their homes to pay for nursing care as they awaited the £72,000 cap on fees due in 2016.
A surprising 1 in 5 over-55s who were considering equity release told lenders they needed the money to fund home improvements so they could receive care in their homes. Why surprising? Why don't they move and trade down rather than refurbish their existing home?
Almost comically, some said they needed cash to pay off existing debts or clear a mortgage... thereby swapping one debt for a probably more expensive one. Again, why don't they trade down?
Almost half of those borrowing against the equity from their homes were doing so to meet “everyday costs”, the Equity Release Council found, although most gave more than one reason.
Other causes included funding home improvements and holidays, with four in ten citing one of these reasons as the motivation. So they put themselves in debt to go on holiday...?
The research found 27 per cent of people wanted to give money to family members, particularly grandchildren who were struggling to get on to the property ladder themselves. So they put themselves in debt to help their kids get into debt? Say what? [We know that some readers will immediately say No it's to buy a home. Financially, that can only be prudent if prices continue to rise. After 40 years they are taking huge risks. The best time to buy is after big falls not after big rises.]
Which?, the consumer group, said ER is “expensive” and should be considered only if absolutely necessary.
Also, savings rates have been slashed by the politicians and Central Bankers since the financial crisis, hitting large numbers of elderly people who relied on the interest to supplement their pensions.
Finally, many retirees have also found that annuities provide a much lower income than they had anticipated.
Why are they turning to ER? Most pensioners are refused traditional mortgages because they are retired. Equity Release is like a mortgage but without the immediate monthly repayments. The borrower is given a lump sum of money that only has to be repaid on death or when the house is sold.
Typically, the interest rate is around 6 or 7%. The interest is added to the debt annually (it “rolls up” each year). As a result, the total debt typically doubles in around 11 years.
Let us reiterate that the total debt typically doubles in around 11 years!!! So, if you start this at, say, 65 your debt will be double by around the age of 76. And you might have a further 20 years to go.
Has anyone asked themselves how much eventually they will pay back to the lenders? Seriously?
Has anyone actually seriously considered just trading down and releasing cash practically COST FREE? We doubt it. What are people thinking of that do this??? Of course, there will be some cases of frailty and age where ER makes some sense. But surely someone in their 60s is not going to be mortified to move house, especially when they see how much tax free money they will release by trading down. Indeed we have a client who this year, as they retired, moved streets away and released capital. We cannot understand the motivation behind staying in a property and benefiting noone but mortgage brokers and banks.
We suspect retirees assume that their house will always rise in value, as it has for the last 40 years. They should think again if we are turning Japanese as we discuss elsewhere.
We trust those who released equity by borrowing realise that their children's inheritance will go right down and perhaps to zero from the house. We just don't get it.
The fact is successive Governments and Central Bankers have given this generation a vast tax free gift. Yet some are then putting a debt on it. You Couldn't Make It Up.