Why equity release is a wolf in sheep's clothing
In our mind, equity release is a wolf in sheep's clothing. It is not as innocent as it at first appears. Traditional equity release is a debt secured on your home. In our view, it offers financial handcuffs rather than financial freedom. Equity release capitalises on the opportunity provided by poor pension provision coupled with rising house prices. We believe that there is a better, more equitable way. For many, the path of fractional ownership leads to a better destination than the debt-fuelled journey of traditional equity release.
According to Legal & General Home Finance, in 2019/2020, 86% of pension pots accessed for the first time had a value of less than £10,000. This one statistic very neatly defines the pension crisis facing the UK.
The UK Government’s Wealth and Assets Survey found that, on average, UK adults thought they would spend 23 years in retirement. It does not take a rocket scientist to work out that £10,000 will not be enough.
In the UK, Legal & General Home Finance estimate that the total property wealth among the over 50s is estimated to be £3.8 trillion, with three quarters (74%) of those aged 55 and over owning their own home. While their average pension pot size may be low, for homeowners in or nearing retirement their homes are very likely to be their biggest assets.
The question for pensioners will increasingly be, can I tap into my prosperous property to top up my paltry pension? Is there a way to release the equity tied up in the home?
Embracing debt to release equity
In our view, traditional equity release products do not do what they say on the tin. Traditional equity release products do not release equity, they replace equity with debt. You take out equity in the form of an interest-bearing loan. Effectively equity release is a debt secured on a home. Where there was equity there is now debt.
We do not like debt
Equity release insiders have told us that the conversion rate on equity release product sales is just 5%, only 5 out of every 100 households who meet an equity release advisor buy the equity release product.
The low conversion rate reflects the fact that older homeowners do not like taking on debt, after all no one wakes up in the morning wishing they had more debt, but if you do, then equity release could be just the thing you are looking for.
The conversion rate suggests to us that those that do replace their equity with debt are either very comfortable with debt, or perhaps under such acute financial distress that they do not believe they have a better alternative.
What do homeowners use equity release for?
Legal & General Home Finance report that the loans provided through equity release are used for a variety of purposes, including, but not limited to:
buying a new car
taking a holiday
paying for care
paying for home improvements
gifting money to loved ones
The elephant in the room
The catch of traditional equity release products is that the equity released has to be paid back, with interest. If the person ‘released equity’ to make up for a paltry pension, it is not clear how the debt will be paid back. The home, on which the debt is secured, may have to be sold to pay it back and for every day the loan is outstanding the amount of interest due on that loan is increasing.
It seems odd to us to have to pay interest to release equity, which belongs to you.
Fractional ownership could turn property profits into appropriate pensions
We believe the answer is to release equity rather than take on debt. Fractional ownership would allow homeowners to sell equity in their homes and receive that equity without taking on any debt. This allows homeowners to benefit from the value of their homes and use the money tied up in their homes to top up their pensions. On the other side of the coin, fractional ownership allows those who cannot get onto the housing ladder to participate in the housing market and start to build up their housing wealth without the need to also stump up a big deposit and take on an even bigger mortgage.
Fractional ownership allows us to participate in the housing market without taking on debt (a mortgage) you can invest as you can afford to, at your own pace, without the burden of debt and it allows others to consume the housing wealth they have accumulated, releasing equity without the need for equity release debt.