Equity release has not always enjoyed the most positive of images. But with so many of us now relying on our property to fund our retirement, and new products coming onto the market, is it time to reconsider its virtues? By Richard Collinson.

Some recent research from LV indicates that one third of those approaching retirement will be “property pensioners”, and relying on money tied up in their home to pay for their lifestyles. Many will be downsizing in order to release capital, but for those preferring to stay put and release much-needed funds, the growth in equity release continues unabated – up over 20% last year to £1.61 billion.

That’s relatively small fry compared to the total property wealth owned by Britain’s pensioners – estimated by Key Retirement last year at £891 billion. Looked at another way, with so many of us entering or in retirement and finding our other savings failing to come up to muster, this could well be THE big growth market in the next decade or two.

SO WHAT SHOULD YOU KNOW ABOUT EQUITY RELEASE?

Equity Release is now a somewhat misleading term and carries negative connotations from the days when such products were expensive and inflexible – leading to financial problems (for instance when a user wanted to move home).

A Home Reversion product (in which a percentage share of the home is handed to the provider) is now a rare beast. While this was once a popular option, just 0.5% of the housing wealth unlocked last year was through for one of these according to the Equity Release Council.

A Lifetime Mortgage on the other hand is little different in principle from a regular mortgage and should be viewed in the same light. Except the borrower can opt to pay no interest and allow it to be added to the mortgage.

Going down this route, of course, means that the total debt will be much higher at the time of repayment (when the borrower, or the surviving member of a couple dies – or when the loan is repaid if earlier). But, importantly, the borrower(s) always retain ownership of their home – again just like a normal mortgage.

There is one feature of a Lifetime Mortgage which potentially gives the borrower a big advantage. Most fixed rates on mortgages last no more than 5 to 10 years, and the further out you go in years, the higher the interest rate is likely to be. With a Lifetime Mortgage, the rate is fixed indefinitely.

This means that the borrower(s) knows for certain what their costs will be for the rest of their lives, as well as how much will be outstanding at any future age – providing a huge amount of reassurance.

The caveat, of course, is what rate of interest is being charged. If the value of the home rises by about the same rate of interest (eg, 5%pa), then the amount of equity left in the home should theoretically be similar to what it was when the plan was taken out, although inflation will have eaten into its real value.

The RetireEasy LifePlan actually allows someone to visualize this in action: to see what their home’s value will be at any given age (given their assumption on annual growth) and therefore how much will be left to be inherited by the kids (or the cats home), or to use if that person then goes into care.

There are a couple of issues that do need to be considered. Firstly, early repayment can result in penalties, particularly if interest rates fall, although some providers will allow annual prepayments of around 10% without penalty. Secondly, releasing funds might affect the borrower’s eligibility to receive certain means tested benefits such as pension credit and council tax benefits.

What you use the Lifetime Mortgage for, of course, is up to you. But many people will find they are running expensive loans or credit cards. You could even elect to roll up your current mortgage. You might decide to have the knee op you’ve long been waiting for or help the grandchildren onto the property ladder. Either way, you should have additional funds to spend throughout retirement.

Not only will this give people the chance to live their retirement to the full but will (if widely used) pump billions of pounds into the economy generally, creating jobs and revenue for the Exchequer.

THE SHAPE OF THE FUTURE

We know the take up of Lifetime Mortgages is growing rapidly, but it still needs more mainstream players to enter the market to broaden its appeal. At present, following the merger of Just Retirement and Partnership, there are only eight significant players in the market, and only three of these – Aviva, Legal & General and LV= – are what would be called mainstream.

This seems like a natural market for the High Street banks to enter and even more so for other insurance companies who need long term fixed rate income in order to cover their long term commitments.

For banks, the risks associated with maybe 30 or 40 years of fixed rate income need to be taken into account, but 30 year fixed rate mortgages in the USA have been the norm for many years, so it must be doable.

With longer lifespans, and the various restrictions and risks associated with saving for the whole of a much longer retirement, the Lifetime Mortgage will become a major source of funds to enable retirees to pay for their retirement needs, as well as avoiding many having to rely on government benefits later in life.

This product must become the norm, and not the exception, for retirees.

HELPFUL INFORMATION FOR RETIREEASY USERS

RetireEasy.co.uk is introducing a Lifetime Mortgage feature in the new Premium Version being launched in summer 2016. This will enable subscribers to model a variety of Lifetime Mortgage products including multiple drawdowns and interest rolled up or partially or fully paid. It will also be possible to set the age at which the Lifetime Mortgage starts and the amount to be taken out.

Subscribers will then be able to save and compare multiple scenarios and chose the one that best suits their circumstances and see how their finances can be affected over the whole period of their retirement.

Go to RetireEasy.co.uk to see what else it can do for you to help you to manage your retirement finances and avoid the stress and worry.

Now check out the FREE financial planner that lets you take control of your future – and make the very most of your retirement years.