Equity release and drawdown plans

Equity release schemes have become increasingly popular in recent years. With property values on the rise in the last ten years, and savings giving poor returns as interest dropped (before the trend reversed and they started to go back up again) have meant that people have had to look elsewhere for returns: their homes.  

Property prices have trebled in some areas since 1997, and most have at least doubled, so people have inevitably started looking at their own property as a way of raising some ready cash.  This is particularly attractive to people who are retired or semi-retired who look to use the increased value of their homes to boost their spending capability.

The average age of equity release has fallen for the first time since figures started being compiled nine years ago. It has fallen from 71 to 70. It may seem a small change, but is seen as a significant indicator of the general direction of the market. There are probably two factors behind it: the first is the wider availability of equity release plans from the age of 55; and the second is the fact that less people are now retiring with good enough benefits from the pension plans to see them comfortably through their retirement. It is also a reflection of a maturing market, and it is expected that the average age will continue to come down.

Demand for drawdown (the disbursement of loan funds provided by the Bank) plans has gone up by an amazing 225% in the last twelve months, says Key Retirement Solutions UK. The year to the end of June saw an increase driven by the sector’s overall growth. Demand for equity release was up by 18% in the first half of 2007, and the total amount of equity released from homes in the first half of the year was £662m. Drawdown is becoming increasingly popular as people see it as a way of providing them with flexibility to take out what they need rather than forcing them to take out more than they want. Drawdown seems to be a good place from which people should start. Doubtless more new providers will join the market as its popularity has grown, and competition will inevitably give more options to people. The drawdown market now accounts for 44% of all equity release plans taken out. The market is expected to continue to grow strongly.

Scotland and Northern Ireland experiences the biggest rise in equity release in the last year, with the amount of equity increasing by 233% and 202% respectively. As for the number of plans, it was the south east that saw the largest number of equity release plans taken out. In the south east the average plan is worth about £60,000, and in London it is £80,000. Here property prices have risen significantly, leaving people living in their biggest, most valuable asset, and maybe the only one that is growing in value.

With the cost of many items rising, and inflation reported to be higher for older people it is not surprising that they are turning to their own home to raise some much needed cash.

Recent volatility in the housing market, rises in the base rate and other costs associated with moving home on the increase, such as stamp duty as more houses fall into higher duty brackets, have all meant that people are tending to stay in their homes for longer. People need cash to make improvements and modernise their homes.

Equity release schemes fundamentally enable you to take borrow against your property’s value. You receive a loan as cash, which can be a lump sum, but more typically as a monthly payment, and you carry on living in your home. The lender recovers the loan by either selling the property after you die or by recouping the money from a sale if you were to sell your property and, for example, move into a care home.

Schemes are now available from age 55, and you must have a property worth at least £30,000. Preferably you should own it freehold. If you do meet these conditions, then you probably are eligible.

The schemes have implications for your family and their inheritance after your death, as most of the schemes do expect provider to sell the house after you die. Thus your property has no value to your family and will not be part of your estate on your death. That might be a bit of a shame for your family.

If you are living with a younger partner, relative or friend there may also be implications to consider. For example, the scheme may state that upon your death, if the property is sold, they cannot continue to live in the house and will need to seek their own home at their own expense.