Whilst UK house prices have been volatile in 2023 as interest rate hikes have increased the costs of mortgages, there have still been significant gains over the last ten years.
In fact, official figures from the Office for National Statistics show that average house prices have risen from £167,716 in January 2013 to £290,000 at the end of January 2023, a gain of 73%!
As a result, many homeowners are finding a greater proportion of their wealth tied up in their home. Analysis by Canada Life in 2022 has revealed that almost £800 billion of equity was available for release from UK homes.
This, coupled with increasing life expectancy and the cost-of-living crisis has led many to consider ways in which they can release capital from their main residence, boosting the amount of cash they have available in retirement.
So what options are available to release capital from your home?
Downsizing
Typically, this is the first port of call for those considering raising capital from their main residence. Nonetheless it is important to consider the advantages and disadvantages of this approach.
Advantages:
- Releases excess cash which can be used to support the seller’s lifestyle.
- The seller may be able to move to a property which is more appropriate given their age, for example a bungalow.
- Does not incur product or mortgage fees.
Disadvantages:
- Significant emotional impact in moving house and this may be difficult practically for older people.
- Incurs agent fees and potentially moving fees.
Remortgaging (Retirement Interest Only Mortgage)
Another option would be to take out a loan against your property.
One of the most popular types of mortgages for retirees are Retirement Interest Only Mortgages. These work in a similar way to traditional interest only mortgages in that the monthly payments cover the interest only, with the outstanding capital paid off later.
The advantages and disadvantages of Retirement Interest Only Mortgages are as follows:
Advantages:
- Ownership of the property is not changed.
- Avoids the need to downsize and move.
- Considered a cheaper alternative to equity release.
- Avoids the issue of interest roll-up (unlike a lifetime mortgage).
Disadvantages:
- Would need to pass mortgage affordability to evidence monthly interest payments are affordable.
- Home will be sold on death or when entering long-term care and is at risk of repossession if the borrower cannot keep up repayments.
- Likely to incur application, arrangement, valuation, and transaction fees.
Lifetime Mortgages
A lifetime mortgage is a form of equity release scheme, designed for older homeowners to raise cash on their homes without having to pay anything to the lender during their lifetime.
The considerations for a lifetime mortgage include:
Advantages:
- Raises tax-free cash relatively quickly and painlessly.
- Allows the borrower to stay in their home for the remainder of their life (or until they need care).
- No fixed repayment date and no monthly payments.
- A ‘no negative equity guarantee’ ensures the borrower will never owe more than their home is worth.
Disadvantages:
- Significantly reduces the amount available to beneficiaries of the borrower’s estate.
- Interest rates are typically much higher in comparison with conventional residential mortgages.
- If interest rolls up on the account, it is estimated that a typical lifetime mortgage will double the debt approximately every 12-15 years.
Home Reversion Plans
These differ from lifetime mortgages in that they involve the sale of between 25% and 100% of the property, rather than the mortgage of it. The following are some areas to consider:
Advantages:
- Raises tax-free cash relatively quickly and painlessly.
- Allows the seller to live in the property (the reversion company is granted a lifetime lease), often rent free. When sold the proceeds are split based on the percentage the buyer and seller own.
- No mortgage interest to pay.
- Provides better value for money when property prices are static.
- ‘No negative equity guarantee’.
Disadvantages:
- The home reversion plan provider takes ownership of the property.
- Provides worse value for money when property prices are increasingly significantly.
- May significantly reduce the amount available to beneficiaries of the seller’s estate.
- May reduce eligibility for State Benefits.
- The seller will have to follow the terms of the lease and will still be responsible for maintaining the home and other costs such as ground rent.
Summary
With more and more retirees finding themselves asset rich and cash poor it is highly likely the market for equity release products and later life mortgages will continue to expand and evolve.
As we have seen there are varying advantages and disadvantages of each option, and the best course of action will be dependent on the unique circumstances of the individual.
It is therefore important that individuals complete diligent research and consult with a specialist before proceeding with any of these options.
If you would like further information on any of the above, please contact your dedicated Financial Planner who would be more than happy to help.
Sources:
Will house prices keep falling in 2023? – Times Money Mentor (thetimes.co.uk)
Halifax records first annual fall in house prices for 11 years – Money To The Masses
Rising house prices create almost £800bn of potential equity – Money Age
How much house prices have risen in all UK areas in the past decade | This is Money