Don’t rush into releasing: Scots urged to ponder equity borrowing

Older Scots have been urged to carefully consider the pros and cons and take professional advice before releasing equity on their homes.

Figures reveal new equity release has hit a record high in the UK, with customers unlocking £5.58 billion in 2022. In Scotland, numbers were up by 40% on the previous 12 months.

The cost of living crisis is thought to be behind the surge in Scots looking to borrow money based on the rising value of their property. However, consumer watchdogs say home owners should be careful before rushing into equity release.

Which?, the consumer rights’ champion, said people should “speak to an independent financial adviser before deciding whether to take out an equity release scheme, and get independent legal advice”.

It also suggested people “explore other options and find out how equity release would affect your entitlement to state benefits. Borrow the minimum amount you need to or choose a drawdown scheme to give you the option to borrow money as and when you need it.

“Consider taking out a scheme that lets you make interest payments each month if you can afford to and choose a scheme with no early-repayment charges or ones that apply only for a limited period.”

The figures revealing the increasing popularity of equity release, from Key Later Life Finance, suggested £3.3bn of the property wealth released last year was used to repay unsecured or secured debt as new customers focused on strengthening their finances with rising interest rates and inflation eating into retirement budgets.

About half of the £3.3bn was used to repay existing mortgages while 38% was used to rebroker existing release plans and 12% to pay off unsecured debts such as credit cards or loans.

David Burrowes, chair of the Equity Release Council, said: “These figures represent another significant step up for a market that was barely registering £1bn of lending activity 10 years ago.”

Equity release allows homeowners aged at least 55 to access the equity, or cash, in their property. There are two main schemes – lifetime mortgages and home reversion plans. With a lifetime mortgage, a loan is secured against the home based on its value. Cash payments can be paid in a lump sum or in monthly payments. Ownership of the property is retained, and the loan is repaid after the property is sold after death or after moving into long-term care. Interest is charged on the amount borrowed.

With a home reversion plan, part of the home is sold in return for tax-free cash. This is available for homeowners aged over 65 and occupation of the property is guaranteed until death or until the occupier goes into long-term care, through a lifetime lease. The property is then sold, and the owner’s remaining equity share in the property transferred to either the family or the estate.

However, financial experts caution that equity release can be expensive and cost significantly more than regular mortgages. Equity release will also affect benefits claimed, such as pension credit and universal credit.

The Equity Release Council advised people to think carefully and seek professional advice before committing to any schemes. It added: “It remains vital that decisions are carefully considered through both a long-term and short-term lens, with family input wherever possible, and with financial and legal advice in every instance.”