“The third one is all of these loans must come with a no negative equity guarantee, so that whatever the loan accrues to, no matter what, you can never owe more than the eventual value of the house.”
There is also some flexibility when it comes to repaying the loan, as Mr Mirfin explains.
“In terms of repayment, clients have basically two options or a combination of the two. The first is they can pay the interest every month but with a fallback that if they ever either can’t afford to pay or don’t want to pay it anymore, it can convert to roll-up interest,” he notes. “They can switch from serviceable to roll-up anytime.
“Alternatively, from day one you can have roll-up – so every month the interest you would have paid is added to the debt and basically that compounds over time. At current interest rates, typically the loan would double round about every 16 years.”
The average lump sum released by clients through later life lending is around £70,000, according to Mr Wilson.
Equity release is increasingly being used to pay off interest-only mortgages and has typically been used as a way of funding home improvements.
“The lump sum generated from unlocking housing wealth can help to consolidate existing debt, and reduce or even eliminate regular payments being made to mortgage lenders and credit card providers, for example, thus freeing up retirees’ income streams,” Mr Wilson says.
“With defined contribution retirement pots being around £30,000 to £40,000 on average, customers can often lay their hands on as much as two or three times that amount via equity release.”
He continues: “Additionally, not only can accessing tax-free cash from housing equity be more tax efficient than using income from pension funds, but by delaying the need for an annuity purchase into later life, clients may be entitled to higher income streams through enhanced annuities.”
More flexible offerings
Flexibility has been introduced over the years into the equity release market, with more features available to customers now.
Mr Mirfin highlights some of these, such as the drawdown facility now offered by some equity release providers.
“What drawdown does is pre-agree the overall facility you can have, in terms of the loan you can have and you can take that over time,” he explains. “So you’ll take an initial amount and then you can come back as and when you want to and take further withdrawals.”