Equity release is increasing in popularity among younger borrowers as Mortgage Market Review rules introduced last year make it more difficult for them to secure home loans.
New figures from the Equity Release Council reveal that as the market for lifetime mortgages has grown, the proportion of new customers aged 55-64 has dropped from 24% in 2011 to 21% in 2013. This continued into the second half of 2014, when only 17% of new customers fell into this age group.
Falling interest rates, rising house prices and an ageing population that is “asset rich yet cash poor” are creating rising demand for lifetime mortgages. Over 21,000 new customers used equity release to raise a record £1.4bn in cash from their housing wealth last year – a 14% rise from the previous high in 2007.
The MMR rules examine borrowers’ spending habits to ensure they can meet their repayment demands should interest rates rise above their current historic low levels.
However, the surge in property prices over the past decade means that an increasing number of younger borrowers have property wealth that they can release, particularly if they are trying to raise the capital to settle interest-only mortgages that are coming to the end of their 25-year term.
And for homeowners who have already cleared their mortgage debt, equity release enables them to enjoy a comfortable retirement. However, it should be remembered that the equity taken out of a property does need to be repaid, often when the borrower dies which can reduce the value of inheritance they leave.
Drawdown lifetime mortgages tend to be the most popular products among equity release customers, with 66%, choosing this option last year, and 34% going for lump sums.
Lump sum customers received an average of £69,118, which the ERC says is 176% higher than the average contribution pension pot. Less than 1% decided to take out home reversion plans.
Product choices tend to be limited for older customers in the residential mortgage market, but new lenders are coming into the market to boost equity release activity and bringing with them more choice and flexibility for consumers. This can be a good option for over-55s who want to get their hands on some of the wealth they have in their homes, but who can't afford monthly mortgage repayments.
However, selling a property could be a better option for younger borrowers wanting to raise the capital to settle mortgage debt. This is because with property values in London still rising, it can be possible to sell a large property in the capital, pay off any remaining mortgage debt and still have enough left in the bank to buy a smaller home further afield.
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