Equity release has been in the news this week. The Prudential Regulation Authority (PRA), which oversees the companies offering loans based on equity of a property, says it is considering whether to revise the system.
Under equity release, homeowners borrow money against their house’s value and don’t repay anything until it’s sold, by which time it should be worth more so realising a profit for the lenders.
Borrowers have to be aged over 55, and they are able to borrow a percentage of the value of the house. They pay nothing, because the money is paid back when they die or move into care.
Interest is added each year or month, and because of compound interest, the loans can grow in size very quickly.
However, there is a concern that, with the rate of increase of house prices slowing, the loan pots won’t grow as quickly as anticipated. This is an issue because the loans are funded by pension providers. The pension holders themselves are not at risk, because their pensions are protected through the Financial Services Compensation Scheme (FSCS), but the lenders could be vulnerable.
Hence the PRA is looking into the whole system of equity release.
In the meantime, equity release remains a very popular way of borrowing for the over 55s. In the three months to the end of June, homeowners aged 55 and above borrowed a record £971m through equity release, according to the Equity Release Council.
There are two options available:
While this may sound straightforward, if you are considering equity release you should seek legal advice first, so you fully understand the process and can then be certain it is right for you and your family.
Do get in touch to chat to the legal team here at Optimum about equity release and we can talk you through it and explain what’s involved.