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As the storm clouds gather over Europe’s economy, many of Britain’s over-50s must believe that the value of their homes will support their living standards through any financial turmoil which lies ahead but according to the latest State of Retirement Report from insurer LV=, nearly one in three of Britain’s over-50s (6.25 million adults) has no retirement savings in place and expects to rely entirely on the basic state pension when they stop work.

It is thought that 1.2 million retired people live on just the state pension, equating to £5,587 a year, which may be boosted to £9,672 a year if they qualify for additional benefits. Even at that level, retired folk have far less than a worker on the UK minimum wage, currently £11,477 per year.

There are fears that the situation will worsen soon. A total of 15% of those already retired or due to retire within the next five years have cut contributions to their long-term savings pot in the last five years. Savers paying into private sector pension plans have cut back on monthly contributions by an average of £523 in the last 12 months. Probably many over-50s, with at least one house price boom under their belts, see the value of their bricks and mortar as a lifeline in old age. This is why equity release schemes - loans raised against the value of a property and usually repaid after the owner has died - increasingly appeal to a generation which might have lived slightly beyond its means.

The latest Equity Release Market Monitor for the first quarter of 2012 from Key Retirement Solutions, a specialist financial adviser, estimates that lending against the value of homes rose to £217.1 million, against £213.5 million for the same period of 2011.

SHIP (Safe Home Income Plans), the trade body for equity release providers, says the proportion of customers choosing to access their equity in smaller tranches is rising rapidly. Drawdown mortgages, where borrowers take an initial sum - usually £10,000 - and further advances when required, accounted for 67% of the market in the first quarter of 2012, followed by lump sum mortgages (32%) and home reversions (2%).

SHIP thinks the popularity of drawdown mortgages over the last quarter is probably the result of more people using equity release to boost monthly income, rather than pay for one-off expenditure. How much each applicant can borrow through equity release depends on their age and the value of a property: at 65, the limit is 30%; at 75, this rises to 40%; and at 85, the general limit is 50%.

Vanessa Owen, head of equity release plans at LV=, says: “We’ve seen a big change in the reason why people take money out of their homes. “In 2008, it was lifestyle changes. People wanted to enjoy some luxury living, or great holidays. Today, more and more people want the money to pay off debts. More and more people in retirement see credit card debts piling up, and equity release is an obvious way to consolidate these debts.”

Owen claims the LV= equity release product works well because it guarantees a limit of the money available on a property for 15 years. There is no early repayment charge after 10 years, and the cost of repaying any money drawn is low.

Darren Dicks, head of retirement at Aviva, says: “It is great news that there has been a 10% year-on-year increase in the value of plans sold. The market is back on track for the rest of 2012. “It is also interesting to see the swing towards drawdown mortgages which account for over two-thirds of all plans sold. In today’s uncertain environment, consumers feel more

comfortable reserving an amount they can call on as and when they need it, rather than taking out a large lump sum.”

Michelle Mitchell, charity director general at Age UK, says: “Many older people who are asset rich but cash poor consider equity release as a way of raising extra money. Our research found that more than a third of equity release customers had used the extra cash to help clear debts. But any decision to release capital in this way should never be taken lightly. All customers should seek specialist financial advice before taking this step, to make sure that they understand all the risks involved. Those who opt for equity release should take time to compare the different schemes on offer to be sure they find a plan to meets their individual needs.”

The global credit crunch changed the landscape of the equity release market. Banks and building societies have quit the sector altogether - because of the problems of fixing long-term funding. Their place has been taken by insurance companies and some providers who quit the sector - including More 2 Life, Hodge Lifetime, Stonehaven and Newlife - have now returned.

In theory, the demand for equity release is immense. It is reckoned that older people are sitting on about £752 billion locked up in the value of their homes, so £1 billion a year which they currently draw is a tiny fraction of this. But remember that this is not cheap money: the interest rates on most equity release loans arrange between 6.5% and 7%, with interest only payable when the borrower dies, or the property is sold. An initial advice of £10,000 doubles to £20,000 in approximately 11 years, while a £40,000 loan soars to £80,000.

However, the average value of all homeowners who sign up for equity release is £195,479 nationwide, so repayment of an equity release debt will usually reduce - dramatically - the amount passed down to the rest of the family. It might also inhibit property owners from making future moves; some homeowners, in fact, prefer to trade down to smaller homes to unlock capital instead of locking into agreements which might influence their later lives.

Equity release doesn’t suit everybody, but it’s interesting to note that there are not many complaints from the 20,000-plus households who take the plunge each year. Life Begins 9

Equity release on the rise

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