Equity release could be a time-bomb because of the way that the interest rolls up, a national newspaper has warned.
The Mail says that home owners who take out an equity release loan at the average interest rate of 4.92% would see their loan double every 14.5 years.
If the interest rate were 6.5%, the debt would double every ten years.
If someone in their mid-fifties borrowed £100,000 and then rolled up the interest on top of the loan, and they lived until 86, the original debt would swell to £800,000.
Equity release has become increasingly popular as a way for householders to access wealth in their home
However, the Mail says that younger equity release borrowers, those aged under 60, are most at risk of costly debt.
In 2009, under 1,000 home owners took out equity release. Last year, this had risen to 2,354.
While yesterday’s Money Mail article, by Samantha Partington, largely confines itself to comments about the effects of equity release on younger borrowers, it also raises question marks about those in their 60s, 70s and even 80s who take out equity release and can these days expect to live into their late nineties or beyond.
Equity release loans are lump sums normally repayable on death or when the borrower moves into care, the article explains.
This also highlights the question as to how care is funded if wealth in the home has been eroded or wiped out.
Baroness Ros Altmann, a former pensions minister, told the Mail: “The way interest on equity release is calculated can often wipe out the entire value of your home in a couple of decades.”
The paper quotes the case of a 57-year-old who took out equity release of £37,000. Nine years later, her debt is now £75,000.
Estate agents cannot offer financial advice, of course, but on the evidence of the Mail article, it does make you think that there is a lot to be said for down-sizing.
What is the problem?
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I get a bit fed up with article’s that seem to show only the bleak side of our world and am beginning to think that most journalists are born in a negative environment. If this article was to be written in its true content then they would offer not just the negative but the positive outcomes of equity release, including later life lending which in this modern world of ours is a small move towards understanding that we are for what ever reasons living and working longer. Company pension scheme are not what they were 20 plus years ago and with the introduction of workplace pensions it will not be long before the state pension disappears so it is necessary that alternative ways are found to support an ageing population financially.
So, and as much as many years ago there was little or no thought of how to advise on equity release or home reversion plans, and thus giving a relatively new product a bad name, these have evolved and with the right training in place consultants with morals, and the understanding it is ‘all’ the adult family that should be involved in the discussions, I believe the products today a far more superior than those of which were given many moons ago. A long term and sensible attitude needs to be held by the providers as well to ensure that the new products and opportunities are not dubbed the next time-bomb!
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Would that be a “time-bomb” for the middle-aged kids who were hoping to inherit their parents’ property ?
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Who’s the Cert CII (ER) qualified journo who wrote this?
99% of UK ER providers are registered with the Equity Release Council, which provides a no negative equity guarantee. Therefore the risk to the homeowner is relatively low compared to term products like standard mortgages.
In reality though, someone in their mid fifties is not the target market for ER. The older you are the more favourable the terms are likely to be.
Poor and uneducated journalism in my opinion.
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This may come as an extraordinary revelation to some but The Mail, Express, Sun etc have zero interest in balance or fairness – or in too many cases, simple morality and decency. Such qualities do not make stories that sell newspapers.
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Martinmelton makes a fine point. Also, where is the 6.5% rate coming from? Today you can secure a rolled-up lifetime mortgage at 2.88% meaning that if you borrowed £100k it would double in just under 25 years time.
A good adviser, who must hold the CeRER qualification, will know their customer well, advise on what state benefits are on offer, ensure that by taking this type of mortgage it doesn’t affect their means-tested benefits, see what other options there are and ensure that they (and their family) are fully aware their estate will be worth less before advising on this type of mortgage.
For a certain type of client this product is great!
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There are many different types of equity release, many of which are a rip-off and taking advantage of vulnerable, elderly people. Others, such as the one I took out a couple of years ago, are effectively interest only mortgages at a higher rate of interest (mine’s around 4.5%) that you can pay back if and when you choose. They take advantage of the fact that it is almost impossible for those over the age of 60 to get a conventional interest only mortgage, but they allow you to stay in your own home if your interest only mortgage is about to mature and can also enable you to sell up and buy a more expensive house and use the increase in capital value over the short or medium term to your advantage. The market is becoming increasingly competitive, but the time is ripe for a major media story on equity release to expose the companies which are using people as a licence to print money; Ros – over to you!
Simon.hughes, I am interested in what you say about a rolled-up lifetime mortgage at 2.88%. Is that age barred?
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