Martin Lewis provides advice on mortgage overpayments
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Pension aged savers, generally those aged 55 or over, have been fortunate to see their property wealth rise recently according to new research from the equity release adviser Key. On the flip side of this, retirement income itself has remained relatively stagnant and these altering realities may force a change in how people plan their retirements.
According to Key’s analysis, over-65s saw their property wealth increase by more than £561 a month as the housing market continued to surge thanks to the stamp duty changes and Budget measures to help first-time buyers.
Similar results have also been found over the long-term, as since Key started analysing the mortgage-free property wealth of the over-65s in 2010 homeowners have seen growth of 58 percent, equivalent to more than £452 billion or £90,420 per household in the past 11 years.
However, while pensioner property wealth has skyrocketed, the elderly have not seen the same boost to their actual incomes, with the average pensioner income only rising £12 to £331 per week over the last 11 years.
In total, property wealth owned by over-65s who have paid off mortgages is valued at £1.232trillion, which equates to an average gain of £1,685 for every homeowner (around £561 a month).
Some have been fortunate enough to see even higher increases, with people in East Anglia and Wales seeing gains of £10,000 and £8,300, respectively.
Will Hale, the CEO at Key, commented on how these realities may force traditional retirement plans to change: “Over the last three-months, the property market has been buoyant – spurred on by the extension of the stamp duty Holiday and the launch of Government guarantees for over 95 percent LTV mortgages.
“That said, the market performance over the last eleven years has generally been positive and over-65s homeowners have seen their property wealth increase by an average of £90,420 over the period.
“This puts into stark contrast the increase in average weekly pension income which jumped just £12 between 2010 and 2020.
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“The retirement ambitions and needs of today’s over-65s as well as inflation make this increase seem even smaller and highlights how important it is for people to consider all their assets at retirement.
“Sitting in a quarter of a million pound home unable to keep the heating on or meet other day-to-day living costs makes no sense.
“Today’s modern equity release products can help people access some of the value tied up in their properties to address these issues and then through flexible features enable them to manage their borrowing by choosing to make ad hoc capital repayments or to service the interest if they wish.”
Retirees appear to be aware of these changing dynamics as recent data from the Equity Release Council revealed the volume of new plans taken out rose by 19 percent during the second half of 2020 when compared to the first six months of the year.
For the whole year, it was detailed that nearly 73,000 new and returning customers were served, equating to £3.89billion of property wealth being “unlocked” through equity release.
Alice Watson, the head of marketing and insurance at Canada Life, commented on what these figures mean for retirees: “[The] findings from the Equity Release Council evidences not only the resilience of the industry but also the consumer’s desire for retirement flexibility.
“Property wealth is increasingly being viewed as a component of modern retirement journeys, working alongside existing pension savings, rather than being a question of using either/or.
“Fewer people are following the ‘traditional’ journey of retiring with a comfortable pension and no mortgage debt, and as a result, the retirement market is undergoing a significant change.
“Whilst releasing equity from a property remains a very significant decision, we know that families across the country are seeing strains on their personal finances, whether that’s from redundancy, rising living costs or caring responsibilities.
“This collective strain is likely to continue being exacerbated by the pandemic and, with the right advice, equity release has proven it can help people to access their property wealth flexibly and safely.”
While equity release options can provide pensioners with income sources for their later years, it should be noted they may not be the best option for everyone.
Equity release can have costly downsides and homeowners are regularly advised by experts in the field to consider their options and take advice before any commitment is made.
On this, the Money Advice Service urges pensioners to heed the following considerations:
- “Equity release can be more expensive in comparison to an ordinary mortgage. If you take out a lifetime mortgage you will normally be charged a higher rate of interest than you would on an ordinary mortgage and your debt can grow quickly if the interest is rolled up. It is worth pointing out house price growth might also be evident. Your plan provider needs to factor in the safeguards they are providing you with (such as the no negative equity guarantee and a fixed interest rate for the life of the plan) in their calculations and can, therefore, lend you at a different interest rate to an ordinary mortgage.
- “For lifetime mortgages, there is no fixed ‘term’ or date by which you’re expected to repay your loan. The rate of interest of a lifetime mortgage will not change during the life of your contract, unless you take any additional borrowing and it will only be applicable to that cycle of extra borrowing.
- “Home reversion plans will usually not give you anything near to the true market value of your home when compared to selling your property on the open market.
- “If you release equity from your home, you might not be able to rely on your property for money you need later in your retirement. For instance, if you need to pay for long-term care.
- “Although you can move home and take your lifetime mortgage with you, if you decide you want to downsize later on you might not have enough equity in your home to do this. This means you might need to repay some of your mortgage.
- “The money you receive from equity release might affect your entitlement to state benefits.
- “You will have to pay arrangement fees, which can reach approx. £1,500-£3,000 in total, depending on the plan being arranged.
- “If you’ve taken out an interest roll-up plan, there will be less for you to pass onto your family as an inheritance.
- “These schemes can be complicated to unravel if you change your mind.
- “There might be early repayment charges if you change your mind, which could be expensive, although they are not applicable if you die or move into long-term care.”
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