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Equity Release

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http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10593930/Equity-release-is-it-time-to-cash-in-on-booming-house-prices.html

Homes are again the piggy banks from which owners are releasing torrents of tied-up cash. The latest figures for equity release – the technical term describing the process by which over-55s tap into the wealth tied up in their property – shows withdrawals topped £1bn in 2013 for the first time since before the crisis.

In 2007, the the biggest-ever year for equity release, 30,000 borrower signed up. That figure almost halved to 16,000 in 2011. It was back at 19,000 last year. The higher sums being borrowed, reaching an average £60,000 for the first time ever, accounted for the high total withdrawn.

Resurgent house prices across the country are part of the reason, commentators said.

But is it wise to withdraw equity as house prices recover?

Equity release schemes have changed and now almost all operate as “lifetime” loans. There is no set term and no payments are made to the lender, either of interest or return of capital, until the borrower dies or sells the home for another reason. The interest accumulates all the while.

From a financial point of view the key factor is the relationship between future house price growth, the interest rate on the loan – and the period for which the loan runs.

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As the interest is compounded the debt mounts significantly. But house prices have also surged, with long-term average annual growth – as measured by the Halifax House Price Index over the last 30 years – of 4pc. Over the next few years the consensus among forecasters is of a more rapid annual growth than this long term average.

But even at a lower rate of future house price growth, say 2pc per year, the cap on the proportion of a property’s value that can be released means borrowers stand a good chance of their own equity in the property keeping abreast of their debt, unless the loan runs for a very long time.

Equity release rates are fixed for the life of the loan, giving some security to borrowers. It is also possible in some cases to “re-mortgage” the deals in future years, if rates and available deals make this viable.

The table, below, shows a range of outcomes where equity is released at today’s current average loan rate of 6pc. A borrower aged 65 in a property worth £250,000 would be able to release up to a maximum of around £80,000 but the calculations here are based on a £50,000 withdrawal. In the worst scenario set out here, he or she borrows over a long period of 30 years, during which house prices rise by a below-trend average of 2pc per year.

In that case the £200,000 equity retained today, at the outset of the loan, ends up as £154,000 in 30 years’ time. That would mean the homeowner’s slice of equity falls from 80pc to 33pc.

Would equity release work out for you? Do the sums

Your house is worth £250,000 now and you release £50,000 at a rate of 6pc which rolls up, compounded. This is how much you will owe after:

10 years

15 years

20 years

25 years

30 years

£91,000

£123,000

£166,000

£223,000

£301,000

But what will your house be worth? Assuming steady house price inflation of 2pc, 5pc or 7pc, the answer is:

House price inflation:

10 years

15 years

20 years

25 years

30 years

2pc

£305,000

£337,000

£373,000

£412,000

£455,000

5pc

£412,000

£528,000

£678,000

£870,000

£1,117,000

7pc

£502,000

£712,000

£1,010,000

£1,431,000

£2,029,000

Why do you need to release equity?

A period of above-normal rises in house prices would reduce the impact of the loan, meaning now might seem a good time to release equity.

But, as lenders point out, the reason why people turn to equity release can largely dictate when they do it.

The most common reason cited by borrowers is a need for money to repay what it left of a traditional mortgage. Here, the regular monthly payments required by the standard mortgage lender are turned into the deferred repayments of an equity release arrangement, freeing up income to supplement pensions or for other purposes. The second most common reason is to pay for home maintenance or improvement.

Stephen Lowe of Just Retirement, a provider, said: “Most people release equity to top up pension savings and so there is relatively little flexibility about when they do it. But looking back over ten or 15 years, it’s clear house price growth does play a part – a sense of rising property wealth makes people more confident.”

But in this housing recovery motive is emerging. Stonehaven, a rival provider, surveyed the advisers selling its schemes and found that a new trend was coming to the fore - parents releasing equity to provide their children or grandchildren with the deposit to buy their own home. This was now the third most commonly cited motive, Stonehaven said. In a rising market this can enable two generations to increase their combined property ownership.

For older owners of valuable homes, inheritance tax planning is also a consideration. The £325,000 individual’s threshold, above which estates are taxed at 40pc, is set to remain unaltered for another four years at least.

Nigel Waterson, chairman of the industry trade body the Equity Release Council, said as more families fell within the net, more were likely to borrow in order to move assets out of their estate. “But it’s still at the top end of the equity release market,” Mr Waterson said.

How much is needed..?

Because most big providers of equity release promise borrowers that their debt will never be greater than the value of their house, the amount you can borrow is strictly limited. The average borrower, aged in their late sixties, can typically release nor more than 35pc of the property’s total value.

Even so most do not release that much. Key Retirement Solutions, which has collated data over many years, says that between 2007 and 2013 borrowers have tended to take about three quarters of the maximum allowable. So in 2007 that was an average £45,000, where £70,000 would have been the most allowable, and last year it was £56,000 out of £82,000.

...and how can you reduce the risks?

In the last five years equity release has become more flexible. Borrowers can apply for a bigger sum than they initially need, and then draw down money as required in future. This limits the overall interest bill. During periods of rising prices, as now, it means the homeowner benefits more from ownership. Other flexible features include the ability to pay interest on a monthly basis, when borrowers can afford to – but with the option to stop.

- For up-to-date news on interest rates, house prices and more, sign up to our weekly Money email here

The Telegraph pushing equity withdrawal.

How long before TV adverts with "why not treat yourself to a cruise" start again?

Was 2008 a dream?

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For a fleeting moment there I thought I was reading D.Mash article and that could be the truth.

Anyone for a £2,000,000 semi (not in London where they exist already).

Not unless the Telegraph also costs £20/day.

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http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10593930/Equity-release-is-it-time-to-cash-in-on-booming-house-prices.html

The Telegraph pushing equity withdrawal.

How long before TV adverts with "why not treat yourself to a cruise" start again?

Was 2008 a dream?

I saw one the other day about equity release, but it was mainly about helping your kids get a mortgage

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In 2007, the the biggest-ever year for equity release, 30,000 borrower signed up. That figure almost halved to 16,000 in 2011. It was back at 19,000 last year. The higher sums being borrowed, reaching an average £60,000 for the first time ever, accounted for the high total withdrawn.

Surely a large percentage of this is going into BTL ? pensions are no longer(are no going to) covering thier lifestyle? lets top it up with BTL

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I would love to be able to get an interest only mortgage that ended when I die. What's the point of living poor and dying rich?

I don't have any children to leave the house to. Well I have a step son from my now ex wife.

But I don't feel the need to give him anything.

Equity release sounds OK to me.

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I would love to be able to get an interest only mortgage that ended when I die. What's the point of living poor and dying rich?

I don't have any children to leave the house to. Well I have a step son from my now ex wife.

But I don't feel the need to give him anything.

Equity release sounds OK to me.

Sell house with you as lifetime tenant.

Just be careful who ends up owning house and be careful crossing roads etc....

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Sell house with you as lifetime tenant.

Just be careful who ends up owning house and be careful crossing roads etc....

My late father bought the house next door to his own off a Lord with a living tenant (who seemingly would not die) in the eighties for about half it's true value then (not much) on the condition that he paid for his upkeep (in the good old days if you worked for an estate the Lord would take responsibility for you when you retired). Poor Mr. Burrows died not long after and my father was free to do what he wished which was to leave it uninhabited for 30years. At least my mum gets to rent it out now (1years rent is less than what was paid for the property*)

*not endorsing BTL

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My late father bought the house next door to his own off a Lord with a living tenant (who seemingly would not die) in the eighties for about half it's true value then (not much) on the condition that he paid for his upkeep (in the good old days if you worked for an estate the Lord would take responsibility for you when you retired). Poor Mr. Burrows died not long after and my father was free to do what he wished which was to leave it uninhabited for 30years. At least my mum gets to rent it out now (1years rent is less than what was paid for the property*)

*not endorsing BTL

paid for 'his' upkeep ie the tenant or paid for upkeep of house?

Not meaning to be personal (and it sounds like you might agree with me), but 30 years empty seems an awful waste.

One of the reasons I like Land Value Tax - annual charges focus minds and ensures land and houses are used.

AFAIK local authorities have powers for empty houses, but they are rarely used.

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The table, below, shows a range of outcomes where equity is released at today’s current average loan rate of 6pc. A borrower aged 65 in a property worth £250,000 would be able to release up to a maximum of around £80,000 but the calculations here are based on a £50,000 withdrawal. In the worst scenario set out here, he or she borrows over a long period of 30 years, during which house prices rise by a below-trend average of 2pc per year.

In that case the £200,000 equity retained today, at the outset of the loan, ends up as £154,000 in 30 years’ time. That would mean the homeowner’s slice of equity falls from 80pc to 33pc.

6% loan rate while the base rate is 0.5%. So presumably if/when rates rise new deals will be more than 6%, thus reducing the equity left.

As suspected the financial sector are going to get the lot. People paying interest on debt from working age to grave.

Edited by Democorruptcy

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6% loan rate while the base rate is 0.5%. So presumably if/when rates rise new deals will be more than 6%, thus reducing the equity left.

As suspected the financial sector are going to get the lot. People paying interest on debt from working age to grave.

Yup, many of those expecting an inheritance will be disappointed.

The equity release people guarantee the sum owed will be capped at the house's value, but the 6% rate seems to ensure it gets to that level as quickly as can be. The 'downside' for releasers is that up to only about 35% LTV can be released under the capped arrangement to allow sufficient leeway for the firms to ensure that on average they get their money.

Care home fees are currently £27k average, and more for nursing care. Funding those, and at 6% to boot, will only take a few years to tap out the possible ER funds from even a pretty expensive home. Presumably at that point, house goes on the market with a bit more urgency if they went down ER route due to a lack of sale in the first instance? More pressure on sales prices, and incentives to cut fantasy asking prices?

I guess a LR search would provide details of a charge from an equity release provider, and the date of a charge. A powerful tool for a would be buyer to know that the screws are bearing down? Might even be able to take a rough stab at when they'll be getting desperate to shift it. It's all very well having the "I'm not giving it away" mentality when there's no mortgage debt or other reasons really pressuring the seller(s), but say a £300k house tapped out with £100k of equity release, the balance rising at £500/month and bills for ongoing care coming in at a further £2k per month out of the pocket, you could imagine that this might concentrate minds.

Hopefully this will help place a lot of downward pressure on prices.

Edited by The Knimbies who say no

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paid for 'his' upkeep ie the tenant or paid for upkeep of house?

Not meaning to be personal (and it sounds like you might agree with me), but 30 years empty seems an awful waste.

One of the reasons I like Land Value Tax - annual charges focus minds and ensures land and houses are used.

AFAIK local authorities have powers for empty houses, but they are rarely used.

Paid for the tenants upkeep.

Not being personal at all. 30years of being left empty was an awful waste but my father was eccentric and didn't want neighbours.

My mum is consciously and retrospectively trying to make up for this transgression by applying to build two social houses on the adjacent land however the restrictions are baffling, the rents she would have to apply are inflexible and must be exactly 10% less than what is deemed the market rate which means she can't charge less in an area already suffering from high rents. The plan was to rent to agricultural workers (countryside) even the architect who has a vested interest in getting this project started is telling her not to bother.

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6% loan rate while the base rate is 0.5%. So presumably if/when rates rise new deals will be more than 6%, thus reducing the equity left.

As suspected the financial sector are going to get the lot. People paying interest on debt from working age to grave.

For a saver that 6% loan over such a long time isn't that appealing. However for a bank that can just pull the money out of its a**e it really is money for old rope.

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Paid for the tenants upkeep.

Not being personal at all. 30years of being left empty was an awful waste but my father was eccentric and didn't want neighbours.

My mum is consciously and retrospectively trying to make up for this transgression by applying to build two social houses on the adjacent land however the restrictions are baffling, the rents she would have to apply are inflexible and must be exactly 10% less than what is deemed the market rate which means she can't charge less in an area already suffering from high rents. The plan was to rent to agricultural workers (countryside) even the architect who has a vested interest in getting this project started is telling her not to bother.

One house and several pertinent and baffling items of information. Thanks.

It's a mad, mad world.

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Paid for the tenants upkeep.

Not being personal at all. 30years of being left empty was an awful waste but my father was eccentric and didn't want neighbours.

My mum is consciously and retrospectively trying to make up for this transgression by applying to build two social houses on the adjacent land however the restrictions are baffling, the rents she would have to apply are inflexible and must be exactly 10% less than what is deemed the market rate which means she can't charge less in an area already suffering from high rents. The plan was to rent to agricultural workers (countryside) even the architect who has a vested interest in getting this project started is telling her not to bother.

My gf is a planner (private sector not council) it seems councils will demand all sorts whilst the process is in motion, but once it's built they'll forget all about it. Say 'yes sir, yes sir, three bags full sir' then after the matter just rent it to agricultural workers for whatever you like. They can hardly check your bank account to see what amount the standing order is can they. ;)

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