Equity release’s unexpected makeover

I think equity release is having a bit of an unexpected makeover.?For years it’s been seen as a means for the older generation to release the value locked away in bricks and mortar to enjoy some well-earned holidays or little luxuries in their twilight years.?

But I believe it’s taking on an increasingly important role in intergenerational wealth management.

This was apparent from the Equity Release Council’s Q2 report in July.?David Burrowes commented on the sector’s post-pandemic recovery and noted, “Equity release has become a socially important means for one generation to help another.” He added that the June Stamp Duty deadline will have encouraged some older homeowners to pass on a ‘living inheritance’ to help family members to get onto the property ladder.

I agree. At a time when savings rates are low and house prices are rising, the younger generation are already struggling to juggle rent payments and saving for a deposit.?Throw in the threat of inflation and job insecurity caused by the pandemic and you’ve got a desperate situation where the young don’t really stand a chance without family support.

OneFamily did some research earlier this year and we found that the financial superheroes during the crisis were parents and grandparents.?In the first 12 months of the pandemic, one in four of the over 50s lent a total of ￡8.2 billion to their relatives to help them through the difficult times.?This was a 44% increase on the previous year.

The Equity Release Council reports that homebuyers could end up ￡326,000 wealthier over a 30-year period than people who rent.?So, why would those very same family members want to watch the younger generations of their family struggle to buy their first home, when they are themselves sitting on wealth that’s tied up in property??It makes no sense to make the young wait for an inheritance at a time when mortgage rates are low and effectively lose money on rent as house prices rise around them.

At OneFamily Advice, this is the conclusion that we’ve seen many families are rapidly coming to.?Equity release rates have dropped significantly over the last 5 years, making it an attractive option as a means to pass on wealth earlier.?Parents and grandparents can then see the benefits that their hard work can bring to their children and grandchildren.?Afterall, they want to see their families flourish rather than hand all their money over to a landlord.?

They’re also looking carefully at the rates they’re being charged and aren’t afraid to shop around or switch from one deal to another if they think it will preserve more of the equity in their property in the longer term.?Recently we had a customer with a balance of ￡62,860 on a rate of 6.20% AER – at the end of the remaining term of 20 years their final balance would have been ￡216,527.?By renegotiating onto a new plan with a rate of 3.92% AER, the final balance would be ￡137,501 – saving ￡79,026 in estimated interest over the course of 20 years.?That’s significant.?

Younger equity release customers, who may still be working, are a generation of people who are used to swapping electricity providers or phone companies if they think they’re being overcharged.?So, why wouldn’t they also want to swap equity release providers if they think their rate can be bettered and they can save tens of thousands of pounds??I think we’ll see that renegotiation becomes a growing trend in equity release.

Customers are changing and we’re entering a new post-pandemic world, so it’s perhaps no surprise that people’s attitudes to equity release are also changing.?And I think this is behind the shift in perception that we’re seeing.?Equity release is becoming more socially acceptable, another option to manage wealth.?It’s no longer about spending their children’s inheritance on frivolities – although I’d argue that grandparents definitely deserve to have some fun with their money.?

Instead, equity release these days is increasingly being seen as just another tool that can be used to help their children and grandchildren to thrive against a difficult economic backdrop. It’s a new way of looking at inheritance, but I think it’s likely to be a change in perspective that we’ll see gathering in momentum.