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”.