Bad for business? How equity release is impacting the property sector
Equity release ads are everywhere these days, and with 60% of over-50s saying they're unlikely to move in the near future, it makes sense for them to free up some cash. But why are equity release schemes so popular, and are they actually harming the property sector? Find out our thoughts in this post.
You can’t watch daytime TV these days without an equity release ad being rammed down your throat. You’ll be relaxing comfortably in your slippers when Eamonn Holmes will suddenly appear, standing in a kitchen that’s obviously not his, and try to persuade you to release some of the wealth tied up in your home.
It’s easy to be beguiled by Eamonn’s slick sales pitch. Research suggests that 60% of over 50s say they’re unlikely to move in the near future. So why not release some wonga to build an extension or reopen the bank of mum and dad? After all, everyone else seems to be cashing in.
With household brands like Aviva, Legal & General, and LV= now offering their own equity release products, more than £3 billion of property wealth was turned into cash last year. That’s an astonishing amount. The problem, however, is that the booming popularity of equity release is having an impact on the property sector. Whether this is a net positive or negative, mind due, is open to debate…
What is equity release?
Equity release is a long-term loan secured against a home. And it’s generally paid back when the property is sold - normally because the homeowner has died or gone into long-term care. It’s therefore a convenient way to unlock cash that would otherwise be tied up. Policyholders can either release a lump sum or take multiple smaller payments as a form of income to support them in old age. And the best thing? They can continue to live in their home as before. Cushty.
The problem, however, is that lenders aren’t stupid. In fact - spoiler alert - financial companies are incredibly adept at making money. Consequently, equity release loans come with a hefty rate of interest, which can be as high as 8.5%. This means that the amount owed can rise faster than the celebrities who endorse these products can say ‘pay cheque’.
As a result, equity release loans can severely reduce the amount a homeowner (or their children) will receive when the property is eventually sold. In some extreme cases, there may be little or nothing left once the equity release provider has taken their slice. Ouch. Therefore, it’s always wise for those interested in releasing equity to speak to a professional adviser before taking the plunge.
Why is equity release so popular?
It’s simple. People find it frustrating to have so much capital tied up in a single asset - especially when this asset seems to go up in value every year. Equity release gives them a way to enjoy some of this wealth without sacrificing too much in the short term; therefore it’s become as mainstream as Madonna. Indeed, there are now twice as many equity release products on the market as there were just two years ago.
This increased competition between lenders has led to more attractive equity release schemes that give borrowers more flexibility: you can release smaller amounts of money, make partial repayments (or interest payments) that minimise the interest accruing on the loan, and repayments can either be made monthly or with a lump sum. Interest rates are also becoming more competitive with the best deals around 2.5%.
However, there’s another big reason why equity release is all the rage: rising house prices. Increases in the value of a property balance out the compound interest that builds up over time. For example, if you’re borrowing money at, say, 5% per year, and your home is appreciating at 6% or more annually, then you’re still wealthier overall.
How equity release helps the property sector
Because over 55s are often too old to take out a conventional mortgage, equity release can help them raise the funds to move home. It might also help them to buy property in a more expensive area, especially if they’re reluctant to use up their existing savings. Equity release can also help people to buy a second home if they’re struggling to raise a deposit in any other way. This isn’t necessarily good for the housing crisis but it keeps estate agents busy.
Perhaps more significantly, however, parents often use equity release to help their children get on the property ladder: a lump sum gift can come in very handy when you’re struggling to put down a deposit. According to Key, the equity release advisors, parents passed over £425 million to their offspring between April 2020 and June 2021 for this very purpose. This is obviously good news for first-time buyers, good news for estate agents, and pretty good for companies that help people to move home, too. Ahem.
How equity release harms the housing sector
There is a flipside to the equity release boom, however: over 55s are downsizing less frequently and equity release is a big reason why. Indeed, of the 60% that are unlikely to move house any time soon, 24% are specifically considering equity release as a means to adapt their current homes and stay in situ. This obviously isn’t so good for the property sector because it reduces the number of homes available to buy.
Equity release is therefore making the housing crisis worse. People are moving home less because, amongst other reasons, equity release gives more empty nesters the wherewithal to stay in large family homes where two, three, or even four bedrooms are now redundant. In days gone by, these homes would have been resold to younger families that need the extra space.
There is another reason, however, why equity release is harming the sector. Not only is it upsetting the traditional housing cycle; it’s also ensuring that younger generations are inheriting less wealth when their parent’s home is eventually sold. This means there’s less wealth floating around to help families move up to the next rung of the property ladder. The purveyors of financial property products are pocketing this money instead - the cunning so-and-sos.
Equity release - the bottom line
With as much as £1 billion now being released in just a single quarter, equity release is here to stay whether we like it or not. Is this good for the property sector? We have our doubts. Although nobody has calculated whether the would-be downsizers outnumber the young beneficiaries of their parent’s generosity, we strongly suspect it’s a net negative for the property sector overall.
One thing to note, however, is that equity release might not prove as popular this year as it has in the recent past. This is because property prices are expected to fall. And equity release obviously isn’t as attractive in a falling market. In fact, the appeal of equity release diminishes as soon as the repayments outstrip the growth in a home’s value.
The maths of equity release are therefore set to change, at least in the short-term, while homeowners wait and see if a dreaded property crash actually occurs. Maybe, just maybe, the nation’s celebrities might have to find a different financial product to flog. Debt consolidation loan, anyone?