The House of Lords committee is wrong: equity release will not solve the problem of funding an increasingly elderly population
Equity release should be one of the key solutions for a Britain that is “woefully under-prepared” for the expected explosion in the number of older people, according to a House of Lords committee this week. But this is a woefully wrong-headed recommendation.
There is a reason why equity release is still a niche market in Britain. It’s because it simply doesn’t work, and should only ever be used as a last resort by much older pensioners desperate for cash.
Take, for example, Aviva’s equity release offering. If you are 65 and have a mortgage-free home worth £300,000, Aviva will offer a maximum equity release “lifestyle” loan of £87,000. That will certainly pay for a luxury round-the-world cruise or two. But after 20 years you will owe £343,000, and after 25 years the sum will be a staggering £483,000.
Aviva promises never to kick you out of your home for the debt or take more than the value of your home. But the figures show what a cruel beast compound interest can be.
The APR on the Aviva equity release loan is 7.1%, and that’s by no means out of line with the rest of the market. But once you roll up debt at 7.1%, it doesn’t take long before it gobbles up everything you have. For what? A few short years of extra cash, paid for by the loss of all your assets at death. No inheritance for the kids, and a millstone round your neck should you want to move home later in life.
Equity release only works over very short periods, and for the extremely elderly. Let’s say you are 85, and need £80,000 to pay care costs for an ailing partner. Over five years, that would cost around £112,000 at Aviva. A lot, but not excessive.
Weirdly, though, Aviva offers equity release loans to people as young as 55. Given that the average 55-year-old can expect to live to about 85, the interest will roll up for 30 years. An £80,000 loan at age 55 would cost £627,000 on death.
What we should be doing is radically rethinking the sort of properties we wish to live in as we get much older. The House of Lords report falls into the trap of trying to find ways for older people to remain in their homes and extract cash from them. It appears to support a world in which four-bed homes should remain occupied by single pensioners using unearned cash gifted them by the property boom, while young families are squeezed into ever-smaller flats and paying ever-higher rents.
Here’s a simple, and financially sensible, solution. Downsize. Got a £300,000 house as in the example above? Sell it to a family, and buy a good-sized flat or smaller home for £210,000. You will be releasing £90,000 without hitching yourself to an insurance company. Stamp duty and removal costs will cost much less than vicious amounts of rolled-up interest. And you can still leave something to your offspring, should you wish.
We fetishise the idea that grannies and granddads must stay in their family homes all their life. Why? So they can close-off rooms, as they are too expensive to heat?
It’s understandable that people have an emotional attachment to their homes, and no one can or should be forced out. The idea of one’s final years in a poky one-bed flat with nightmare neighbours horrifies me as much as anybody else. But a decent-sized, well-managed two-bed mansion block flat, a lift, shops and GP services within close walking distance? No car to worry about, space for family to visit, a park close by? What’s not to like?
I know a woman who after being diagnosed with breast cancer, and her husband retired, sold their £400,000 four-bed home to buy a £225,000 two-bed bungalow and have adjusted their lives accordingly – and put more than £150,000 in the bank. It’s double the maximum they could ever have raised from a conventional equity release loan, they remain in financial control, and have prepared themselves for, hopefully, a long and happy retirement. It’s the only sensible approach to equity release.
Money | guardian.co.uk
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