Spare a thought for cash-poor homeowners
Indeed, our love affair with bricks and mortar is such that many of us are more comfortable using property as a retirement tool rather than committing more money to our pensions. Move over pensions, buy to let rules the roost.
The result of this torrid affair is that we have become astonishingly property wealthy – and no group has benefited more than the over-55s, those on the cusp of retirement. Boffins at retirement income specialist Age Partnership have recently had a stab at calculating the size of the wealth held by those over-55 living in England.The figures they have come up with are mind-boggling. They set my head spinning like a top.
Age Partnership says the over-55s are sitting on property worth £1.2 trillion (that’s £1,200 billion), and this figure will shoot up over the next 20 years as those aged over 55 grow in number.
If house prices go nowhere, it will rise to £1.7 trillion. If house prices rise by an annual 2%, it will top £2.5 trillion. Fantastic news? Of course. But it’s not as marvellous as you might think. Many of these over-55s are property rich but cash poor. Reluctant to downsize, and with meagre pensions put aside, they are struggling to meet their household bills.
The rise of this cash-poor, asset-rich pensioner forms the basis of a recent report from leading academics at the universities of Birmingham and Essex. Entitled ‘Consumer demand for retirement borrowing’, it looks at the need for sensible mortgage finance to be made available to older borrowers so that they can live (financially) comfortably in retirement and have a buffer put aside to meet social care needs.
The report tackles a variety of bugbears – for example, new draconian mortgage regulations that are preventing all bar a few imaginative lenders (primarily building societies) from lending to the elderly beyond their retirement age.
But it’s the report’s focus on equity release – plans that allow homeowners to release equity via the taking out of a mortgage that require no monthly repayments (interest is rolled up) – that is most interesting.
It says the equity release sector is screaming out for more product innovation and greater product flexibility. Without it, the market will remain niche, rather than mainstream. I couldn’t agree more.
Equity release has its critics, none more so than former tennis star Andrew Castle, who recently complained about the onerous early redemption charges his parents-in-law were forced to pay on a plan they got rid of because they wanted to move house to be nearer their daughter. He went on to say that lifetime mortgages – the main form of equity release – represent one of the “biggest scandals in this country”.
Castle’s arguments are not without merit – early redemption penalties are horrendously expensive (though they are spelt out in documentation homeowners receive before an equity plan goes live). But equity release plans are not a scandal. Far from it. They are a sensible option for many cash-poor property owners, provided they understand what they are getting into (especially the impact of interest charges increasing their outstanding debt) and use the plans sensibly.
Indeed, I believe the equity plan market of today is more consumer-friendly than ever. Slowly but surely, more providers are coming into the market, bringing with them greater competition and helping keep (fixed) interest rates low. Legal & General is the latest to offer new plans, and it won’t be the last. More competition, please!
Also, new product features are being developed all the time. None has been more revolutionary – and consumer- friendly – than the ability of homeowners to draw down their equity release funds as and when they choose, rather than in one go. Staggering access to funds helps keep interest charges under control.
I am sure that, provided new ‘challenger’ providers continue to come into the market and suppliers strive to improve their products, equity release will in time become mainstream. It has to. Otherwise we’re all in danger of dying cash poor but asset rich.There’s no fun in that.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
Early redemption charges
You may think a lender would be grateful to you for paying off your debts early. Alas, no. Mortgages and loans levy early repayment (or redemption) charges because the profitability of your loan or mortgage to the lender is calculated on the basis that you’ll pay every payment (see APR). To pay the loan/mortgage off early – even to remortgage – means the lender will make less profit and so claws back potential lost profit with an ERC, which could be three months’ interest. The earlier into the term you repay the loan, the higher the ERC might be.