Top tips to stop equity release spiralling out of control as thousands use option to fund everyday costs or repay debts

THOUSANDS of homeowners are turning to equity release to fund everyday costs or repay debts, Sun Money can reveal.

It comes as interest rates are rising for borrowers — up to an average of seven per cent this year compared to four per cent in 2022, making it more expensive.

Experts warn this now puts homeowners in greater danger of wiping out the value of their home, meaning they have less cash to pass on to loved ones.

Here, Samantha Partington explains how to stop equity release getting out of control . . . 

HOW DOES EQUITY RELEASE WORK?

IT lets homeowners convert some of their home’s value into cash — effectively a loan.

Most people who apply for it use what is called a lifetime mortgage.

You can take the money as a lump sum, in several smaller amounts or as a combination of both.

You can choose to make repayments or let the loan amount and interest roll up, and it will be added to the amount you owe.

The loan amount and interest is repaid by selling the property when the last borrower dies or moves into long-term care.

These are more expensive than a normal mortgage — but many people choose to use them later in life when they need access to cash.

SIGN OF THE TIMES

RISING inflation and the cost-of-living crisis have changed how people use equity release.

Exclusive data from broker Responsible Life shows 21 per cent of borrowers used equity release to repay their mortgage in the first four months of the year, compared to 19 per cent last year.

Ten per cent used it to improve cash flow, up from five per cent at the same time last year.

Jim Boyd, chief executive of trade body the Equity Release Council, said: “With the higher rates that we’ve seen over the last few years, you find that customers typically have one pressing need such as repaying their mortgage and then they choose to take out a little more, to gift or improve their lifestyle in retirement.

“When rates were lower, more people borrowed for aspirational reasons such as holidays and home renovations, but this has changed.”

RISING RATE RISK

RISING interest rates mean your home’s value will deplete more quickly, especially if you choose not to pay interest on your loan.

Average rates are now 6.81 per cent, with some providers charging almost nine per cent, according to finance information firm Moneyfacts. This is up from 4.1 per cent in January 2022.

Borrowers are also warned against avoiding interest payments.

According to broker Prime Lifetime, a borrower who took out £100,000 at seven per cent would owe £275,903 in 15 years if they did not make any payments and the interest was added to their debt each year.

Des O’Hara, from Prime Lifetime, said: “When rates are high, by not making any interest payments the amount that you owe will double or more much faster.”

HOW TO STOP INTEREST FROM SNOWBALLING

EQUITY release mortgages have become a lot more flexible in recent years.

You can set up a direct debit to repay your interest and a proportion of your loan each month, if you choose.

Beware of repaying too much, as it could trigger an early-repayment penalty, which can be as high as 25 per cent of your original loan balance, though it can decrease the longer you have your loan.

Some lenders also offer a reduced interest rate if you pay back more than 25-per-cent interest each month.

Another option is to take a drawdown equity-release plan, to keep your interest low.

You can agree a total lump sum of equity that you would like to take from your home — but instead of taking the whole amount at once, you can draw down smaller sums as and when you need.

You only pay interest on the money you have withdrawn.

You could also ask family members to pay your monthly interest if you have withdrawn the equity to help them out with a house deposit, for example.

Borrowers should ask their broker to review their interest rate each year to see if there are cheaper deals on the market.

Although you are likely to incur a hefty penalty for repaying your loan early, you could end up paying less interest overall by switching deals.

Always choose a broker and lender who are members of the Equity Release Council.

All its firms must stick to a set of standards which you can look up on equityreleasecouncil.com.

'It's better than using credit card for cash'

VIVIEN Laing, 76, initially took out an equity release in 2016 to pay back a small mortgage and to carry out improvements on her home.

She borrowed £80,000 when rates were around 4 per cent.

Last year, Vivien, who helps run a not-for-profit business that provides training to GP staff, took out a top-up loan of £20,000, this time at a rate of 7.7 per cent.

To stop her debt from snowballing, she pays the interest each month plus a little extra to bring down the overall amount owed.

Vivien, from Wiltshire, said: “I wouldn’t have considered taking equity release 15 years ago because you couldn’t repay the interest, but now customers are given more choices, which I think is more ethical.”

She says the higher interest rate doesn’t worry her.

“I want to visit my daughter in Minnesota later this year, do some more home improvements, make a positive change to my cash flow and help my children if needed,” she explained.

“If I was using a credit card it would be a much higher interest rate and the amount you can borrow is less.”

Broadband prices rising

THOUSANDS of Now broadband customers will see prices rise from July, with average bills increasing by £36 a year (£3 per month).

Now, owned by Sky, has around 400,000 customers, but those on its social broadband tariff will not see prices change.

The Now Broadband Basics tariff, which offers discounted rates to those on Universal Credit and other benefits, will remain fixed at £20 a month.

The firm also hiked its broadband prices by £3.50 a month in July 2023.

Now said in a statement: “We understand that things are tough right now, and so alongside investing in improvements, we’re committed to keeping prices as low as we can.

“The costs of providing services have, however, increased significantly, and it’s affecting the entire industry.”

With most companies, you can usually only cancel penalty-free if you are outside of your contract’s minimum term.

However, Now Broadband customers have a right to leave early without facing a penalty.

If you are unhappy about the price hike, you must tell Now within 31 days of receiving notification of the change to avoid being charged.

If you’re already out of contract, it’s always worth visiting price- comparison sites, including MoneySuperMarket, to see if you can get a better deal elsewhere.

Pound up against Euro

THE Pound has leapt to its highest value against the euro in almost two years.

Sterling was trading at about €1.1785 – a 21-month high – on Wednesday, which is great news for sunseekers.

A strong Pound means holidaymakers can get more for their money when exchanging cash.

The Pound’s growth is a reflection of the fact that markets are betting the Bank of England will only cut interest rates once this year, in September.

Whereas the European Central Bank is expected to reduce rates twice, starting next week.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “The Pound has soared against the euro because the market thinks that interest rates are going to come down sooner and faster in Europe than in the UK.

“If you are travelling to the Eurozone this summer, it might persuade you to exchange at least some of your cash while the Pound is riding high.”

But remember, there is never a guaranteed optimal time to convert your cash.

James Lynn, co-founder of travel debit card Currensea, says: “People can try to take advantage by exchanging their holiday money now, but the Pound could continue to rise.”

And remember, do not use your credit card to buy currency, either.
Otherwise, you’ll end up paying a cash fee and having interest added on top.