Assetz® News - Equity release 'not just the last resort'

Equity release 'not just the last resort'

14th June 2006 |

A new report by an independent financial research company has concluded that equity release need not be seen as merely a "last resort".

Titled Equity Release in the UK – Easy cash or the final resort, the report has been published by Defaqto and its chief message is that equity release can often form a genuine solution to financing retirement. With the government's White Paper on pensions reform published just three weeks ago, retirement planning is currently a hot topic in the UK and Defaqto is arguing that equity release can play a central role.

There is no doubt that it is a booming market and members of Safe Home Income Plans suggest it will grow from £1.4 billion this year to £2.4 billion by 2008.

The report has found that demand for equity release is coming from a cross-section of society.

Many adopt the strategy because they hope to continue the same kind of lifestyle that they enjoyed when in employment, while others are simply concerned about low retirement incomes. Defaqto observes that providers have started to respond to this new scenario and they are developing appropriate products to meet the demand.

Research suggests that retirees in the UK have £400 billion of equity tied up in their main homes, while the working population has around £480 billion.

Releasing some of this equity is seen by many as a shrewd way of generating a lump sum that can be used for holidays, medical fees or simply savings and it is a financial approach that is certainly gaining momentum.

House price inflation in the UK over many years has been extremely strong and the new report suggests that this has been central to the growth of the equity release market. For instance, if a house was bought for £38,304 in 1986 with a 90 per cent mortgage of £34,474, the homeowner would now own a property worth £172,979.

This would mean that their equity stake had climbed from £3,830 to £138,505 in just 20 years, which represents a staggering increase of 3,500 per cent.

David Black, the author of the report, points out that most people have a shortfall between their retirement income and their spending needs. It is a factor that many fail to take into account and there is clearly a worrying amount of ignorance in the UK when it comes to retirement planning.

New research from JPMorgan shows that 53 per cent of Brits think that pension providers use financial vocabulary to deliberately exaggerate the complexity of pensions as some kind of strategy. Around 30 per cent think that CDs and DVDs are pension terms, while only 20 per cent understand the terms defined contribution (DC) and defined benefit (DB).

It is this basic lack of understanding that is leaving people short of cash when they reach retirement age and Mr Black suggests that equity release can be a viable way of alleviating this strain.

"The chance to tap into the equity built up in their property represents a relatively easy way to produce an additional income stream or to get a cash lump sum. Clearly there may be many possible alternatives for the consumer that should be investigated but it will be difficult for many to find such an agreeable solution," he said.

He went on to suggest that the use of equity release will become even more prominent in the future, "as governments cast around for ways to supplement state pensions".