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equity release buffer guide

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The idea of equity release has been around since house ownership existed. Freeholds became leaseholds as rich landowners found themselves asset rich and cash poor, and therefore needed to release equity for their working holidays in Jerusalem. A fair segment of our current land law derives from the time of the crusades, but luckily has become much less crude over the years.

History of Equity Release

The oldest known existence of modern equity release is well known in the financial adviser circles who practice in this market, and may indeed be as apocryphal as it is well known. The story is that an elderly widow was in need of funds after the end of world war one and sought the advice of a local solicitor. The solicitor offered to buy the property but to allow the widow the live in the property rent free for the rest of her life. He offered much less than the actual worth of her property as he would gain nothing from it for an undetermined length of time. The calculating lawyer believed that the widow would only last a few years before dying and he would take ownership of a valuable property at a discount price. As in most stories of this kind, the widow outlived the solicitor by many years, and due to the nature of the contract, took back full possession of her property. She had in fact gained free money from the transaction.

Equity Release in modern times

These days the wealthy solicitors have been replaced by building societies and insurance houses for the most part, and as corporations don't die at nearly the same rate as wealthy solicitors, the prospects of free money has diminished to nil. The providers of equity release in the modern era are well aware of the risks when betting on a human's longevity and this has resulted in the costs of equity release plans becoming relatively high compared to other means of raising cash that do not expose the lenders to the real risk of someone living on well after any reasonable person should have shuffled off.

So what is this equity release?

Well the easiest way to release money from your property is to sell up and buy somewhere cheaper. If you own a property worth around £350,000 and you wish raise £50,000 then perhaps selling and buying a £300,000 property would do the trick? Unfortunately life is not that simple. The cost of downsizing will include estate agent fees, stamp duty, solicitor's costs, removal costs, decorating, removal costs, and possibly new furniture to fit in differently sized rooms. The total cost could easily top out at £25,000 but a more conservative estimate would be £15 to £20,000. So to raise £50,000 from a £350,000 property the more prudent among us would be looking at properties around £280,000. This may mean moving way out of the area, away from friends, family, local amenities and well frequented public houses. Basically downsizing means potentially elongating or even cutting off an established support network that has been built up over a lifetime.

This is where the modern lenders have stepped in to offer an alternative

The lifetime mortgage and home reversion plans. Like the rich solicitor of old, the premise remains the same. They will offer funds secured on the property in the hope of realising returns on the death of the homeowners. With no fixed timescale for their repayment, a very tight regulatory framework and high costs to administer, these plans have some drawbacks. They are limited to certain ages, usually 55 or over. They have, on the face of it higher than usual interest rates, the typical lifetime mortgage is between 6-7% when the Bank of England base rate is 0.5%. People tend to forget that the typical high street standard variable rate is around 4.5% making the difference not that large. The further upside is that this rate is fixed for the lifetime of the mortgage, so there is no need to fear base rate rises like we saw at the end of the nineties. The biggest draw is that they ask for no monthly repayments, though they are available for those that can afford it.

By Ed Haliwell

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