Pensioners forced into expensive equity release to meet soaring living costs

By Lauren Thompson
A perfect storm of rock-bottom savings rates, poor pension payouts and inflation is forcing more older people on fixed incomes to take out expensive equity release mortgages.
Rather than tap into their home’s equity as a way to feather their nest in retirement, many are now doing it to meet everyday living costs — or even to invest in the stock markets in the hope of greater future returns.
More than 4,100 homeowners released £206million worth of equity from their homes between July and September this year — a 10 per cent increase on the previous three months, according to trade body SHIP.

Michael and Fiz Chattin released equity from their home three years ago to boost their retirement income. Back then, their three-bedroom house in Chiswick, West London, was worth £600,000. They released 25 per cent of the property's value, giving them a lump sum of £150,000

The average amount released was £49,703, with 60 per cent of people taking a drawdown mortgage (where capital can be taken as needed) and 36 per cent taking a lump sum. Andrea Rozario, a spokesman for SHIP says: ‘Many pensioners are suffering real hardship at the moment.

‘Understandably they are looking to utilise their biggest asset to free up cash. However, it is vital to explore all your options before considering whether to take out equity release.’
Equity release schemes are only available to those who own their home outright and are aged 55 or more.
Their advantage is that you can receive a lump sum or regular income, there’s no need to make monthly repayments, and you stay in your home until you die.
The disadvantage is it’s an expensive way to borrow — rates tend to be between 6 per cent and 7.5 per cent and your house must usually be sold on your death to repay the debt, often leaving your beneficiaries with very little or nothing.
Given the squeeze on incomes, though, many pensioners are making the decision not to leave their family home to their children — and instead raise cash that must be repaid by selling the house when they die.
Saga, the financial services company for older people, has calculated the ‘real’ rate of inflation for those aged between 65 and 74 has increased by 20 per cent over the past four years, compared to 14.4 per cent for the population as a whole. This is because pensioners generally spend much more of their money on essentials such as gas, electricity and food, which have all spiralled in cost.

The big squeeze on pensioners

When most people retire, they buy a ‘level’ annuity which provides the same income every year for the rest of your life. So the higher inflation goes, the more your spending power is eroded.
And the shaky housing market is also making it very difficult for property-rich, cash-poor homeowners to sell up and downsize.
But experts warn freeing up cash from your home to invest elsewhere is a drastic decision.
Justin Modray, owner of advice website Candid Money, says: ‘The conventional wisdom is that you shouldn’t borrow to invest — but older homeowners who need to generate income might have no other choice.

You need to be careful though to generate a decent return on your capital without taking too much risk.’
Ten questions you should ask before taking an equity release plan www.thisismoney.co.uk/release

‘I’VE MADE SOME GOOD RETURNS ON MY INVESTMENTS AND IT'S BEEN A WELCOME BOOST TO OUR INCOME'

Michael and Fiz Chattin released equity from their home three years ago to boost their retirement income.
Back then, their three-bedroom house in Chiswick, West London, was worth £600,000. They released 25 per cent of the property’s value, giving them a lump sum of £150,000.
‘We considered downsizing, but we have two children and two grandchildren, so we want to keep a decent-sized home  for them all to visit,’ says Mr Chattin, 71, a retired industrial relations consultant.
‘Fortunately, in Chiswick prices have continued to rise — so there should be some equity left in the property to leave our children.’
The Chattins’ equity release plan with LV= has a fixed interest rate of 6.5 per cent. They have invested most of it in unit trusts and cash bonds.
‘I’ve made some good returns on my investments and it’s been a welcome boost to our income,’ says Mr Chattin.

HOW EQUITY RELEASE WORKS

Homeowners have a choice of two types of schemes. One option is a lifetime mortgage, which lets you take out a loan on your home in return for a single tax-free lump sum, or regular capital withdrawals.
The loan is secured against your house and you continue to own the property. How much you can release depends on a combination of your age, health and the value of your home.
The interest you owe will ‘roll up’ over time so you pay interest on the interest, as well as the balance.
This means your loan doubles every 11 years, which will seriously erode your equity.
For example, a 65-year-old who owns a house worth £150,000 releases 30 per cent of equity and receives a £45,000 lump sum.
In about 20 years, the debt would have ballooned to £180,000. Hopefully, property prices would also have increased, so there would still be some equity to leave to beneficiaries.
The alternative is a home reversion plan where you sell all, or a chunk, of your home in return for a lump sum or regular income and the right to remain living there.
On death or a move into long-term care, the firm you sold it to will be entitled to its share of the property’s value at the prevailing market rate.