Why I’d be happy for my parents to take equity release


Cash strapped parents often reject the idea of equity release over concerns about it eating away at the family’s inheritance. Children can also be sceptical about the security of their parents’ money when it comes to releasing equity and whether it will impact their own finances in later life.

However, the potential benefits and improved quality of life equity release can bring some older borrowers is not something to be ignored. If you were to ask me if I’d be happy for my parents to take out equity release, the answer would be a resounding ‘yes’, and here’s why:

It’s not as expensive as you might think

Even with the rise in interest rates, equity release may not be as expensive as you first thought. According to the Equity Release Council (ERC), the average amount released in Q1 2023 was £102,345 and the average customer age was 68. Taking into consideration the average life expectancy for men and women stands at 79 and 83 respectively, we can estimate the interest accumulated throughout the average persons lifetime to see how much equity release really costs.

The following example uses these averages and is based on a 68 year old releasing £102,354, with a 6.50% interest rate. It highlights how much a man and woman can expect to owe if they live to the average age of 79 and 83.

Start No. of years Cash sum / balance Property value Potential inheritance
2023 0 £102,345 £294,329 £191,984
2034 11 £208,809 £512,136 £303,327
2037 14 £253,654 £535,024 £282,024

If you prefer you can use our equity release compound interest calculator to personalise your calculation.

To put this amount into perspective, the table also shows the average property value of £294,329 in December 2022 and how this could grow using the governments Land Registry actuals for the periods before.

You can see that at the outset, the cash amount taken compared to the property value is 35% rising to 47% 14 years later. However, despite this increase, a significant inheritance of £282,024 remains intact ready to pass on to beneficiaries.

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You can still leave an inheritance

If inheritance is a concern for parents and children alike, you don’t have to leave it to chance. These days plans offer inheritance protection which guarantees a percentage of the value of your property is left for family to inherit.

And whilst using the money tied up in your home this way will inevitably reduce the amount families can inherit, there are other benefits. Although some borrowers use equity release to enhance their quality of life, others use some of the money released to help family financially, gifting money to children and grandchildren. A living inheritance that the whole family can enjoy.

Plans are flexible giving you greater control

In addition to preserving a percentage of the value of your home, plans these days offer great control allowing customers to make repayments to lower the cost of the loan.

You can also opt for a drawdown mortgage which gives you the flexibility to only use the money you need, holding the rest in reserve for a later date. Another way of saving money as you only pay interest on the money you have released.

It's regulated

If you’re concerned that equity release could leave the family inheriting debt, it may interest you to know that all lenders who are members of the ERC offer a ‘no negative equity’ guarantee that ensures you never owe more than the value of your property.

In addition, the market is tightly regulated by the Financial Conduct Authority, offering protection to customers through their strict rules and principles.

So if you are considering equity release for you or your parents, just make sure the company you choose is authorised by the FCA and a member of the ERC.

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Is equity release suitable for younger borrowers?

Whilst I would be happy for my parents to consider releasing equity from their home, it can also provide a viable option for younger borrowers in the right situation. To qualify for equity release you need to be over 55 years of age and own your own home. You can have an existing mortgage but this will need to be repaid with the money you release.

If you are asset rich but cash poor, equity release may offer a way of tapping into that property wealth, especially if you are not concerned about leaving an inheritance for family.

Using the same averages as the above table, the following example shows how much a 60 year old would expect to pay over 23 years (to the age of 83) with an interest rate of 6.50%.

Start No. of years Cash sum / balance Property value Potential inheritance
2023 0 £102,345 £294,329 £191,984
2048 23 £454,553 £747,595 £293,042

So again, you can see that given the increase in property prices, there could still be a reasonable amount of equity left in the property after 23 years. And whilst today’s inflation is higher than recent years, the Bank of England expects this to reduce to around 2% in 2024 and for years to come.

Should you or your parents release equity today?

In a perfect world the best time to take equity release is when interest rates are at their lowest – but life’s not perfect.

To help you understand more about how equity release could work for you, we work in association with Age Partnership, one of the UK's leading equity release specialists. If you would like to know more about releasing equity from your home, please get in touch by phone, email or arrange a callback.

Or to find out how much cash you could release, try our free online calculator

Alternatively you can find details for other specialist brokers, IFAs and providers on the Equity Release Council’s ‘find a member’ website.

 

 



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