Equity Release: defusing the time bomb?

Many of today’s over-50s are in the fortunate position of being able to choose equity release in order to provide additional income in retirement or to generate a lump sum for a special purchase or event

According to the Equity Release Council (formerly SHIP), the equity release industry body, only 20% of equity releases in 2011 were for the purpose of repaying an existing mortgage.

Following generations may not be so fortunate. Property values have generally stalled over the past five years or so and many of the mortgages taken over the preceding 10 years were on an ‘interest-only’ basis. Put simply, anyone with an interest-only mortgage is required to repay their loan at the end of its stated term.  Figures from the Financial Services Authority (FSA) and the Council of Mortgage Lenders (CML) suggest that 40% of the 11.2 million existing mortgages were provided on interest only terms, of which £120 billion is due for repayment in the next 10 years.

The time bomb – interest-only mortgages

The problem is that many people with interest-only mortgages have no idea how they are going to repay their mortgages. Even those who had plans may have had their plans thwarted by disappointing investment returns or poor endowment performance

The FSA recently told a House of Commons Select Committee that there was a “ticking time bomb that has been created over the last 20 years and what we are trying to do is make sure that time bomb does not get any worse.”

Neither the FSA nor the CML has any firm plans to solve the problem but it is likely that new regulation will put a halt to most new interest-only mortgages – or at least put substantial obstacles in the way of anyone seeking an interest-only mortgage.

Equity release may help to defuse the bomb

Contrast the position of someone who has recently taken out an equity release through a SHIP member and has paid off their original repayment mortgage with someone who took out an interest-only mortgage 20 years ago and has just five years left on it.

The former will have received detailed, impartial advice from a fully qualified and regulated financial adviser as well as independent legal advice from, hopefully, a solicitor specialising in equity release such as a member of the Equity Release Solicitors’ Alliance (ERSA). The latter probably got no advice about their mortgage.

The former has security of tenure for their lifetime, a no negative equity guarantee and the ability to transfer their mortgage to a new property. The latter may well have their home repossessed in five year’s time if they don’t repay and will remain liable for any shortfall.

The former probably has the safety of a fixed interest rate. The latter may well already be at the mercy of the lender’s standard variable rate and will be in a very vulnerable position when the end of the mortgage term arrives.

Maybe a partial solution to the problem is for more people to consider equity release as a means of repaying an existing mortgage. Maybe the providers need to convert interest-only mortgages to lifetime mortgages. Certainly, equity release could prove to be one of the few ways we can defuse this ticking time bomb before it goes off.

This is a guest post from Michael Foxford, who is a Partner at Birchall Blackburn, a law firm that provides independent expert legal advice to those who wish to release equity from their home. Birchall Blackburn is a founding member of the Equity Release Solicitors’ Alliance (ERSA).