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Equity release: how the country is retiring on credit

With an increasing number of people struggling with debt as they retire, could equity release be the answer?

 
Equity release: how the country is retiring on credit

With an increasing number of people struggling with debt as they retire, could equity release be the answer?

Thousands of homeowners aged over 55 sought debt management help last year, according to the Consumer Credit Counselling Services, highlighting the need for people to plan for retirement. On average those seeking help owed £29,772 on credit cards, personal loans and other unsecured debts.

The money management charity says that increasing numbers of its older clients see equity release schemes as the only way of clearing what they owe. Others are using the schemes to top up their retirement income, help their grandchildren pay spiralling university fees, or pay off their mortgages where endowment policies have fallen short.

Key Retirement Solutions analysed its equity release business last year and found that the average pensioner taking out an equity release plan on the value of their home has debts of £35,991. Moreover these clients were making on average repayments of £297 a month on their debts, taking bite out of the average retired household income of £12,412 a year after tax. 

Drawdown loans

‘We continue to see people using equity release to repay debt because of the real impact it has on their retirement income. One in five of our customers use equity release to pay off an outstanding mortgage and the average amount repaid is £30,000,’ Mirfin confirms. ‘In some cases they still have the debt because their endowment policy didn’t produce enough to pay off the mortgage.’

But haven’t static or falling house prices deterred older homeowners from taking out equity release loans or reduced the maximum amount that they can be borrow? ‘Lenders did reduce their maximum loans to value a bit when the credit crunch hit, but they are more or less back to their old level now,’ says Mirfin. For example, a 70-year-old single homeowner could borrow between 30% and 37% of the property’s value, either as a single lump sum, or as a smaller lump sum with the facility to draw down extra cash at a later date.

‘Some 75% of all our equity release loans are now on a drawdown basis,’ Mirfin says. And this is increasing year on year. ‘The proportion this year was around 5% higher than last year.’ Drawdown is a cheaper way of borrowing if you want to subsidise an inadequate retirement income because you only draw on the cash in relatively small amounts and the unpaid interest rolls up at a much slower rate.

Unsecured debts

Key Retirement Solutions’ figures to June of this year show that the average initial drawdown release was £28,174 but the total amount available was £53,328, and the average loan overall was £44,314. Total sales in the first half of 2011 were 10,448 – 5% higher than the 9,928 in the first half of 2010.

‘The proportion using equity release to clear mortgages rose slightly from 17% in 2010 to 20% now, while those clearing unsecured debts dropped slightly to 31% from 33%,’ Mirfin confirms.

Many pensioners have no hope of ever paying off their debts – not least of all because average interest charge on credit card outstanding balances is around 18%. According to the national money education charity Credit Action, UK banks and building societies wrote off £9.5 billion of loans to individuals in the four quarters to March 2011.

For the first three months of this year they wrote off £1.89 billion of which £866 million was credit card debt. Clearly not all of this will be pensioner debt but with the over 65s making up probably the largest group of low income families, they will have accounted for a large proportion of this.

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6 comments so far. Why not have your say?

Bizzie Lizzie

Jul 29, 2011 at 11:14

Be very careful of these equity release plans, compounding interest on interest soon means that you have very little equity in your home which leaves very little flexibility as you get older. Far better to downsize if you are in your 50's or 60's, though the schemes can work if you are older and sure that you are settled in your final home

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Simon Taylor

Jul 29, 2011 at 12:53

Might be a good hedge against falling house prices though. Presumably the only security for this debt is the value of the house. If that sinks below the value of the compounded debt, it's the insurer's problem, not the homeowner's.

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Michael Peters Fenwicks

Jul 29, 2011 at 14:23

Equity release schemes stick!!!!!! It is a product that will become the next PPI in my experience as they're too many pitfalls with regards to the overall underwriting when one considers long term impacts.

I wonder what the FSA will say this time?

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bb

Jul 29, 2011 at 18:43

downsizing is not easy in the current property market,we have been trying for 2 years despite several reductions in the price,so don't knock equity release until you old enough!

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Ann Haig McVitty

Jul 31, 2011 at 00:12

I wrote a lengthly comment on my not too happy experiences with Equity Release, and then tried to copy it for my records, and lost the lot,! as there did not seem to be any way of copying what I was about the post here.

This was exrramely annoying as it reminded me that I have yet to take up the maladministration of the Bank concerned over the way they treated my attempts over 8 years to redeme an Equity Release Life Time Mortgage taken out some 9 years ago, which turned out to be nothing more than a millstone round our necks, when it came to the inflexability of these schemes, when it comes to trying to amend them, when less restrictive products come onto the market, but are found to be only available to "new customers". etc.

I will try to summarise briefly, what I set out earlier -

In our case the complaint that the long term snags to these scemes, are apparentlyh never pointed out by advisors, who seem to concentrate on the immediate benefits to taking out one of these schemss, rather than the devastating affects of combined interest over the years to one's ability to have to fund long term care for one of a couple requiring the selling the house; leaving insuficient equity to provide a home for the person not in care; etc. Could end up with person, not in care having insufficient money left to provide a roof over their heads! -

To the "double whammey" of one's executors having to wind oup ones estate and apply for probate (before any proceeds from the estate can be distributed ) all of which can take a year to complete -

while at the same time being forced to sell the house at a time other than one's own choice, with all the time interest clocking up on the loan, further eroding the value of the estate.

(One of these tasks alone, would be quite enough for executors, often family members ,to cope with).

I have twice appeared on TV on the subject of the un-advertised snags of many equity release scemes, but little has come of that, other than, statements to the effect, that" there are circumstances where Equity Release is of considerable advantage to some people; but it tends to be either single people, or those without family responsibilities or the wish or need. to be able to heop children or grandchildren in the future etc. and that if someone of my financial knowledge and ability, can have got themselves into the emotional and financial ly disadvantaged state we did, without any material advantage , then "heaven help" others less experienced in financial matters!

In our case I ended up arranging to pay up the outstanding combined interest over the first 3 years, tried and failed to re-negotiate the terms for another two years, and then paid simple interest on the outstanding loan monthly for the next three years, reducing the capital sum by £,5,OOO increments until able to pay off the balance - and get the house, and decisions about our furture back into our own control, this spring, after 9 years of increasing worry over what was happening. It all this has cost considerably more than the original loan, from which we have not benefitted after the first 6 months, it having gone not on a "world cruise" but on a replacement car, houshold repairs, and a small amount of family funding, and boost to a personal pension etc.) .

It is only because people will undoubtedly be driven to Equity Release Schemes because of the economic circumstances we are all facing now; that I want to say yet again, that the "powers that be" ie. FSA. should be looking far more carefully than they appear to be doing, at the way these scemes are marketed, looking at the short term advantages, without the long term loss of peace of mind etc. etc.

Ann Haig McVitty (82)

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Michael Brooks

Oct 27, 2011 at 14:51

My position is that I have one small property with no mortgage, that I have as a holiday let. My £55 carers allowance (Mum 92, me 64) means that although I have been fully let this summer, with already a few bookings for 2012, my income won`t probably cover my expenses. within 10 years, all being well, I should inherit the family home and my money worries should disappear. Being debt free with unencumbered property ought to put me in a good position for a little equity release but I have been frightened off even making enquiries now.

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