Figures released today show that retired homeowners in the UK raised more than £2.1 billion from equity release schemes in 2016. These schemes allow homeowners of a certain age to cash in part of their property equity in return for a tax-free payment. The details will vary from individual to individual taking in their age, situation, value of property, etc. This has been a very useful source of income for retired homeowners although record low interest rates in the UK have also brought remortgaging options back into the mix.
Figures for Scotland
Retired homeowners in Scotland accounted for £86 million of the overall £2.1 billion across the whole UK. This may be due to a variety of reasons which include the performance of the underlying property markets and individual financial situations. While the vast majority of those releasing equity often use the funds to finance home and garden improvements many also use the additional cash to clear loans and credit cards. Some homeowners simply use the additional capital to fund holidays and help out family members, often becoming the “bank of mum and dad”.
Interest only mortgage maturities
If we look back to the 1980s and the 1990s there was significant interest in interest only mortgages many of which are now approaching maturity. This was a time when property investment was at its highest and the UK was going through a major change. Many of those now looking to release equity from their properties have been forced down this route due to an inability to fund up-and-coming mortgage capital repayments. However, due to the relative buoyancy of the UK property market over the last 30 or 40 years the vast majority of homeowners will have seen a significant increase on their initial capital outlay.
Equity release and remortgaging
Equity release has increased dramatically over the last 20 or 30 years offering a very interesting option for those in retirement. This particular group of society often see a significant reduction in their income despite having significant equity tied up in their home. There is the opportunity to downsize and bank a profit but more people are now looking towards equity release. However, historically low interest rates have forced many equity release companies to become more creative and competitive.
On one hand remortgaging rates have fallen dramatically but on the other lending regulations have significantly tightened. Whether or not the remortgaging market is open to the vast majority of retired homeowners remains to be seen because they will have limited capital income.
Banking a profit
Even though the performance of regional property markets across the UK varies enormously there is no doubt that the vast majority of homeowners now have a significant paper profit on their properties. More and more are now looking to bank part of this profit to help fund their retirement and while remortgaging may be an option for some equity release schemes are also becoming more popular. There are obvious drawbacks when looking at equity release schemes but there are also costs associated with traditional mortgages. It really is a “horses for courses” situation because it will depend upon the individual’s financial situation.