The piggy bank home
Oct 21, 2014
Let me ask you a question; do you view your home as a very hungry money pit that constantly makes demands on your wallet, or do you see it as one of your most valuable assets; a precious source of cash that will allow you to live the life you want?
It appears that an increasing number of us are seeing our properties as exactly that, thinking of them as big fat piggy banks that can be dipped into at a time of need with an equity release loan.
In a recent report, the Equity Release Council stated that the typical value of an equity release mortgage has risen by 12% in the first half of this year to £67,421, suggesting that more people are tapping into the cash tied up their homes and withdrawing on average larger sums of money.
The report goes on to comment about the potential benefit of these types of loans to some retirees, especially given that the average age of those releasing equity from their home is 71, highlighting the “usefulness as a means of clearing an existing mortgage, repaying other borrowing or lining up a holiday or home improvement project upon leaving work”.
The piggy bank home is not a new phenomenon though; in 2007 over 30,000 people took out an equity release mortgage that allowed them to release cash from their homes. A slump in the economy over following years saw volumes drop whilst the housing market was in the doldrums however figures are now on the rise with 19,000 opting for equity release in 2013.
Whatsmore with house prices rising at their fastest rate since 2007 in the first 6 months of this year, we should expect to see another equity release bubble as confidence returns to this market.
The report revealed some interesting and quite surprising facts relating to equity loans and house prices. It states that in order to preserve the remaining equity in your house, the value of the home must increase by 40 per cent over a 16 year period. Basically the value of your home will have increased sufficiently to cover the interest payments on the loan, leaving the equity intact.
It then goes on to say that in order for that equity to grow in line with the 2 per cent annual consumer price inflation, house prices must increase by 68 per cent.
With that in mind, the really surprising point is the national index shows that over the last 16 years, the growth of house prices has actually exceeded 260 per cent and at no time has it dropped below 112 per cent.
Considering the fact that the vast majority of equity release loans are less than 50% of the property value, this news must be reassuring not only to the home owners but also their potential beneficiaries.
In a separate report looking at our property habits through later life, insurer MGM Advantage suggests that 12% of the UK’s retired population plan to downsize their property within the next five years.
This means as many as 1.36 million people are planning to move into a smaller home to help fund their retirement; joining the 1.99 million people who have already made the decision to downsize.
Illustrating the point that a significant amount of cash could be unlocked from a typical home, MGM say a pensioner moving from a detached property to a bungalow could expect to get on average £102,861 once they have taken care of moving costs and stamp duty. Thanks to the rise in house prices, this cash amount has increased by 18% compared to a year ago when the average amount unlocked was £84,776.
Andrew Tully, pensions technical director at MGM Advantage, said: “People often refer to their property as their pension, and these numbers show that any are considering downsizing to provide an income boost in retirement. However, the downsizing dream could turn into a retirement nightmare, as some areas of the country fare much better than others. This is simply a reflection of the housing market in the UK.”
He goes on to warn that relying on property as a piggy bank to fund retirement is a risky plan adding “Banking on your own home to provide an income in retirement does not come without risk. The old adage of all your eggs in one basket still holds true.
Careful planning and consideration should be given before making the move, and with returns available from the cash released still very low, it is likely the capital will also be consumed over time.
If people want to stay in their homes to avoid the upheaval of moving, then solutions like equity release can provide an alternative route.”
Releasing equity or cold hard cash from your home is a big step; one that should not be taken without first consulting your family, solicitor and financial adviser however if you do the ground work and ensure it is the right option for you, your ‘piggy bank home’ could just help make your retirement life that little bit easier.