We are going to take a look at the effects that lockdown has had on the equity market, with comparisons to last year and how and why people are using this.
Is the equity release market open during the current lockdown?
Yes, it’s very much in full flow. There’s always a demand for people releasing equity from the properties. The market last year saw approximately four billion pounds worth of value being released from properties, with over 85,000 people taking advantage of it. It certainly hasn’t slowed up.
In terms of the dynamics, we’re obviously not able to see people directly but as you know, people are using online services, Teams Meetings or other ways of communicating.
How and why are people using equity release?
We look at this constantly and the statistics are probably still very similar to what they’ve been for the last few years. We’ve still got this debt clearance, in terms of people having previous interest-only mortgages.
There’s 30% of people releasing equity just to clear interest-only mortgages, which we’ve covered before where people come to the end of the mortgage on an interest-only basis and the banks are asking them to pay it back. Thirty percent of those 85,000 people are using it to claim a mortgage.
This is mind blowing, on the basis that 60,0000 interest-only mortgages were coming to an end in 2020 and that will continue through 2021. There’s still so many interest-only mortgages out there. Unfortunately, people tend to leave it until the last minute as well. We still find that they bury their heads and think it’ll go away.
People tend to do that with remortgaging. Advisors get people phoning up and explaining their fixed-rate mortgage is coming to an end in three weeks. It takes more than three weeks to resolve that but people don’t always realise how long the process can take. It’s a lot better when it’s in a controlled environment and addressed earlier on.
Whether you are buying or selling, remortgaging or releasing wealth and going down the equity release route, Solicitors are stretched to the maximum capability right now aren’t they?
Yes. You’re using specialist conveyancing. There’s another layer of advice involved in equity release, but it’s still time consuming and people are still working from home. All the processes have slowed down.
Are the 30% equity release statistics current?
Yes, they are 2020 statistics and up to the minute.This could change but they have been fairly standard over the last few years.
Interestingly, when we look at this number overall, the average amount released has gone up, from about £75,000 to £85,000. The actual amount people releasing has gone up quite substantially in that sense.
Without getting too figure orientated, there’s nearly five trillion pounds worth of value locked in property for the over 55’s. They’ve potentially got access to about five trillion pounds worth of value tied up, which is incredible.
Is “The Bank of Mum and Dad” still as popular now as it’s ever been and one reason why people do equity release?
Certainly one in four are looking at releasing money to gift to family or friends. That’s certainly still very prevalent, especially with the requirement of higher deposits now from the lenders. As we all know, 95% mortgages are unheard of, and there’s not as many 90% mortgages around.
First Time Buyer are finding it more and more challenging to get on the market. Therefore, they are turning to ‘The Bank of Mum and Dad’ who are probably one of the ten biggest lenders in the country, in terms of lending money. It’s still very prevalent here.
Are homeowners and over 55’s particularly doing equity release to gift family and subsidise their income at this particular time?
Definitely. If you look at the overall use for just the 30% to clear their own mortgage in terms of taking equity release, and then there’s 17% of people who are taking equity release to pay their own debts.
You’ve got nearly 50% of the usage of equity release being directed towards clearing some form of mortgage or other debt. It follows that if those people have got those debts, then the family have got those debts, and even more so with the advent of covid and all the issues that go through that.
This can only increase because there’s more and more people with more and more financial problems. If there’s five trillion pounds tied up in property then in some cases that would be the only way out or solution for families to assist their own families in terms of, “let’s get you out of this financial hole unfortunately you’ve found yourself in.”
At least this gives families an option, doesn’t it?
It does. The property prices have gone up. If you put 7% on your average property price, that’s a lot of a lot of equity.
One of the concerns people have is how they might erode their equity with an equity release product. However, there are all sorts of illustrations to show them how. This depends on how they borrow money, whether they take a lump sum or over a period of time. This is called drawdown facilities.
In most cases, people are quite surprised at how their equity sustains over a period because obviously house prices go up. Yes, you’re talking about taking your equity out, but I suppose it’s a bit like drawing revenue from your shares. If you’re taking the dividend out, but the shares are going up. Pensions are also similar to equity release as well.
People are certainly not using it to go on holiday! Although interestingly, only 3% of people are using it for that purpose. Not that there’s anything wrong with that. People do that probably because people can’t go on holiday at the moment.
One in 10 are using this for home improvements and again, those home improvements aren’t necessarily because people want to do the house. For example, It might be that people need to do house improvements for health reasons.
Rather than choosing to move, roughly eight out of ten people over the age of 70 don’t want to move house. They’ve lived in a house for a number of years and they don’t want to move. In terms of bungalows, there are not as many being built anymore, because they’re not as cost effective than they would have been in the old days. Getting hold of a bungalow sometimes is almost impossible.
In that case, what better way than to manage your health and wellbeing with your own home. This might include installing a lift and putting in a walk in shower. There’s all sorts of home improvements that people can make and use the value in the property to help them do that.
It’s not a question of value, it’s a question of, “We have a desire or a need for some improvements and we don’t want to move”. However, one of the things you should always consider with equity release is, whether moving is the right thing to do.
Moving is the most stressful thing you can go through in life, as they say. So why go through that? Equity release is life changing for some people.
What about interest-only mortgages?
Worryingly, they are making a comeback. It will never be as it was 20 years ago but as we go into these challenging times, there’s more and more people inquiring.
This is not your equity release market. This is your general First Time Buyer and home movers inquiring about interest only mortgages, because obviously they’re more manageable and more affordable.
They’re only paying the interest off, which is fine at the moment but they’ll end up in another 20 years thinking, “I’ve not not paid off the capital sum that I borrowed” therefore they’ll be in the same boat.
There’s a worrying sign re-emerging of the interest-only mortgage, which, when managed properly, is not a problem. It’s interesting that it’s back on the agenda, with more people asking about these mortgages at a very young age.
The equity market is still very busy, and very much open for business then?
Talking to clients virtually and via a computer isn’t always ideal, especially when it’s something as serious as equity release. You can do this remotely but it’s important to talk with somebody face to face to get a full understanding.
A lot of clients seem to feel more comfortable in the same room as an advisor. It’s great news that vaccinations are now proceeding and hopefully it won’t be too long before we can get out and about and sit in front of people. It helps with confidence too.
At the moment, everything is done online and we look forward to the day when we’re running around the region, going out to see clients again and seeing them in the comfort of their own homes.