The Equity Release Council is rubbing its hands with glee this morning. Its latest figures reveal £393.9 million was lent over the first three months of the year, making it the best first quarter on record. But it seems to me that this is no cause for celebration.
Equity release – or a lifetime mortgage – is somewhat of an extreme form of secured borrowing. It enables over-55s to borrow money against equity they have in their home and the cash can be used for any purpose the borrower likes, such as home improvements, holidays, new cars or helping their family.
Typically there’s no interest to pay upfront but instead it racks up at a fixed rate, agreed upon when the loan is taken out. The average rate is somewhere between six and seven per cent.
The loan lasts for the rest of the borrower’s life and the interest ramps up so quickly that usually the only way for it to be repaid is for the borrower’s beneficiaries to sell the property.
Ideally the borrower enjoys the rest of their days, happy and healthy and having put the money to good use. But life’s complicated and equity release charges for complication.
All manner of fees are woven into contracts – and not every borrower is fully aware of them until it’s too late. Last summer, former tennis ace Andrew Castle told of the plight of his in-laws to serve as a warning to anyone thinking about turning to the product to raise funds.
They took out a £70,000 lifetime mortgage but when they needed to move into a care home just five years later they were hit with a £46,000 bill, comprising an early redemption charge and other fees.
The family complained to the Financial Ombudsman Service but were told the product provider hadn’t done anything wrong so they’d have to pay up.
There may be nothing ‘wrong’ with equity release from a regulatory perspective, but the fact it is thriving is a damning indictment on the availability of credit for older borrowers. They’re being hung out to dry by overzealous banks and building societies.
Traditional mortgage providers have been scared off, thanks to the cumbersome mortgage market review. The regulation aimed to make lenders take more responsibility in assessing an individual’s ability to afford a loan, but vague wording and a fear of compliance officers has caused many lenders to become overbearing. Some ask borrowers how much they spend on haircuts, the gym or even a pet. As for lending to those coming up to state retirement age? Forget it.
The average age of a homeowner turning to equity release is nearly 70 – or 69.8 to be exact. And the average value of their properties is just shy of £295,000, with customers typically borrowing less than a third of the total value, according to the Equity Release Council.
So this is an industry largely driven by septuagenarians needing to raise in the region of up to £100,000. All because they’ve been abandoned by mortgage lenders who refuse to let them remortgage or take a further advance – despite many of them having significant pension income and equity.
Today may be a good day for the equity release industry but it’s a day for the mortgage market to hang its head in shame.
Laura Whitcombe is knowledge and product editor at ThisisMoney.co.uk.
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