The appetite for downsizing is growing in Scotland, yet for many homeowners it will prove impractical. For older homeowners unable to trade down, whether because the potential gains are minimal or the subdued housing market makes it difficult to secure a sale, one alternative is equity release.
Plunging pension incomes have seen demand for equity release rise steadily in recent years, even as the housing market has stalled.
The plans allow homeowners aged 55 or over to unlock the cash tied up in their property. Homeowners typically borrow money against the value of their home, with the debt repaid from the sale of the property, often after they die or go into care. Most schemes taken out these days are drawdown arrangements, where borrowers can take small chunks of equity from their property as and when they need it.
More than 500 equity release loans were sold in Scotland in the first six months of this year, according to Key Retirement Solutions, with almost £20 million of equity released from those homes.
The two main forms of equity release – lifetime mortgages and home reversion plans – are both fully regulated and most of the main providers are members of the Equity Release Council. The council’s code of conduct includes a “no negative equity” guarantee, which means that in the event of the value of the home falling below the value of the loan, the lender would write off the remainder of the loan.
But there are drawbacks. Despite recent modest falls equity release loans are more expensive than conventional mortgages. There are also concerns about a lack of clarity over the early repayment fees that some lenders charge, while many people are deterred from equity release by the implications for family members in line to inherit their property.
So while equity release is an often valuable option at a time of rising life expectancy and shrinking pension incomes, anyone considering going down this route should first take specialist advice.
JEFF SALWAY