Rising house prices – should I use equity release?

The stamp duty holiday combined with many homeowners realising a need for more living space, has resulted in a booming housing market. This has resulted in house prices rising, with the average house price at a record high of £238,831. For homeowners aged over 55 the increase in house prices has made equity release a more attractive option., As data from the Equity Release Council revealed the first three months of 2021 saw a 7% year-on-year rise in equity release, with £1.14 billion being released during this period.

Although equity release is growing in popularity, it is not the right option for all homeowners. Here we look at how the rising house prices are impacting equity release and whether now is a good time to borrow using equity release.

Rising house prices makes equity release more attractive to homeowners as it means that they can release more money from their home. As well as this, for homeowners still paying off a mortgage, the increase in house prices will likely mean that their loan-to-value (LTV) will be lower, which often means they can secure a deal offering a more attractive equity release rate. While this makes equity release highly attractive homeowners may want to be cautious about releasing too much equity from their home, as it could result in leaving a significantly lower inheritance behind than they intended if house prices crash. Equity release plans that meet the Equity Release standards, however, will have a no negative equity guarantee which means that the borrower’s estate will never have to repay more than the property is worth.

For many homeowners the benefits of taking equity release now outweighs the risks, but as equity release can often have a long-term impact on finances whenever it is taken, homeowners should speak to an independent financial adviser before making a decision to ensure it is the right option for them.

Although equity release can be a good way of unlocking money built up in homes without the homeowner having to move home or repay a loan during their lifetime, it can significantly impact the inheritance they leave behind.

As already highlighted, if house prices crash this can impact the value of the home which can mean that very little of the proceeds of the house sale are left over when the equity release loan is repaid. As well as this, when equity release is taken out, interest is added to the loan, which also has to be repaid when the property is sold after the homeowner dies or moves into permanent care. Although the negative equity guarantee includes interest repayment interest owed can accumulate to a significant amount over a number of years again reducing the amount remaining from the property sale once the loan and interest are repaid.

The rapid growth in equity release deals over the last five years has, however, meant that many plans now offer much more flexibility. For example, it is common for plans to allow drawdown, which means that borrowers can borrow smaller amounts at a time, with interest only being charged and added to the amounts borrowed, rather than one single lump sum. As well as this, there are also deals that allow borrowers to make partial repayments or interest repayments, which can avoid or reduce the amount of interest accruing on the loan either by payment of a lump sum or on a monthly basis.