Equity release might have significant disadvantages that many seem to have become blind to, since releasing £50,000 could cost £133,000 over 20 years, research has concluded.
Independent financial adviser firm Hoxton Capital Management, which crunched up the numbers, said that these calculations take into account the average equity release cost at present of 5.18 per cent.
According to Chris Ball, managing partner of Hoxton Capital Management, if interest rates rise over the coming years, which they are likely to do, and equity release goes up to 7 per cent a year, £50,000 worth of borrowing will cost the retiree £166,000, £33,000 extra.
He said: “"e have estimated the average UK pension pot to be around £210,0000, even though it needs to be closer to £300,000 to provide individuals with a viable annual sum for retirement.
“People are now increasingly using equity release as a way of bridging that gap.”
Statistics from The Equity Release Council showed average lending overall at £72,217 in the last quarter of 2017, with more than £3bn worth of equity released by older homeowners last year.
Mr Ball said these figures “could show that the lure of a lump sum is causing many to turn a blind eye to the equity release warning signs”.
Mr Ball also argued that equity release substantially reduces the equity in the saver’s property, meaning his beneficiaries will release quite a bit less than expected.
He said: “If interest charges build and you live for a long time after taking out a lifetime mortgage, total debt could also eventually exceed the value of your home.
“That’s why it is also advisable to look for no negative-equity guarantees, so that family will not have to repay more than the property is worth when the scheme ends.”
He also noted that not enough people consider the costs associated with equity release including the requirement to obtain independent legal and financial advice.
Increasing a person’s income or receiving a cash sum, he added, could also affect any benefits the individual is currently receiving.
He said: “The higher your income, the less benefits you will be entitled to receive so where you many gain on the one hand, you will lose on the other.
"Most people who use an equity release scheme lose their benefits, which can put them at a real disadvantage.”
Industry experts have, however, questioned the results of the Hoxton’s analysis.
Andrea Rozario, chief corporate officer at Bower Retirement, branded the research as “somewhat confusing,” as it doesn’t seem to “take into account that for many saving into a personal pension scheme is just not affordable”.
She said: "Also, often given their home is serving an immediate purpose, some are prepared to invest in making their home comfortable with a view to releasing equity at a later stage should they need to”.
Ms Rozario also stated that the analysis also “seems to ignore the plethora of safeguards with equity release, which includes fixed interest rates for life of the mortgage and does not consider possible house price inflation over the 20-year term quoted”.
She said: “Of course there are fees associated with the advice and independent legal advice, as there would be with any number of other financial products.
“As for the impact on state benefits this is part and parcel of the advice process, and it is simply incorrect to state that most people whom take an equity release plan will lose their benefits.
“This is a complicated area and one of the reasons why qualified advice is essential.”
For Craig Harrison, managing director of Creative Wealth Management, this research possibly demonstrates the effect of compound interest over time, although it does not consider house price inflation over the same time period.
He said: “Given the UK’s demographics of ageing population, poor levels of private pension provision and enormous amount of capital tied up in UK property, equity release growth looks set to continue.
“As more entrants come into the market I would expect greater competition to drive costs down, although much depends on interest rates, which will have to go up at some point.”
Gem Durham, independent financial adviser at Obsidian, argued investor bias “plays a big part in the decision to take out equity release – people value money that’s available immediately more than what they potentially give up”.
She also noted that people also underestimate their longevity.
She said: “So, the real danger of equity release is taking it out too early (in your 60s and perhaps early 70s) or living a long time. This is key as it’s the compound interest that’s the problem.
“It has its place and its uses though – particularly for the very property rich and cash poor who are determined not to downsize, or those who have no beneficiaries or those whose children have done very well for themselves and are already wealthier than their parents.”
maria.espadinha@ft.com
