Financial planning expert Matt Begley offers advice on how our homes could be helping our financial future.
Property prices in the UK have been on a largely constant upward path over the last 20 years. The average UK property price has almost quadrupled over a 20-year period to sit at £209,971.* Although inflation over the years eats into some of that growth, that’s still a pretty impressive statistic. If we then look at a separate piece of research and consider property values for just the over 65s, across the shorter timeframe of the last seven years, the average 65+ homeowner has gained £66,000 in value. This equates to a rise of £9,400 a year.** So, if you’re considering whether an equity release plan could work for you, then don’t discount the impact that property prices may have over the next 20 years or so.
So what are your options?
You could opt for a lifetime mortgage and decide not to pay any interest over the lifetime of the loan, enabling you to free up much needed funds to meet other costs, plus it would be one less regular payment to worry about. However, this benefit could also be a disadvantage, as there will come a time when the ‘compounded interest’ needs to be recovered. Whilst this would only occur when the last plan-holder dies or goes into long-term care, it may have an impact on your beneficiaries, and could add up to a sizeable amount if the loan term runs for a decent number of years. For example, if no interest is paid off, the amount owed on a loan may double after around 13 years.
Roll-up or not to roll-up?
Let’s then look at an example of what could occur after 13 years, if someone took out an average lump-sum loan of £92,376 at, say 5.5% fixed interest. With the interest accumulating, the loan would double to £185,285 – an increase of £92,909. However, had they (or perhaps their children, who’d have a vested interest in this) paid off all of the interest each month, then after 13 years the interest payments would have amounted to £65,780. That’s £27,129 less than the roll-up scenario. With some products, it’s possible to go even further by considering paying off some of the capital too, with the obvious financial benefits.
Any house price growth?
Into this mix, you should add property price considerations over the same 13-year period. For this example, we use an average house price of £296,022 for a lump-sum lifetime mortgage borrower.^ If annual house prices continue to rise at the current rate of 3.1%, then after 13 years the property value would be £440,237 – an increase of £144,215. Of course, there’s no guarantee of property price rises, and inflation would need to be considered too, but it is something to throw into the mix in relation to the cost of borrowing. Understandably, these are complex issues so it’s essential that you take advice if you’re looking to release equity from your home. So why not give the team at Harris Begley a call so that they can help guide you through issues.