Equity release should not be seen as a last resort but considered as a possible solution to financing retirement, says a report out from financial research company Defaqto.
It says house price inflation is the driving force behind the growth of the equity release market, with it predicted to grow from 1.4bn this year to 2.4bn by 2008.
Someone buying the average house for 38,304 in 1986 with a 90% mortgage of 34,474 would now own a house worth 172,979. Their equity stake would have risen from 3,830 to 138,505 in just 20 years an increase of around 3,500%.
Demand for equity release is now coming mainly from those wanting to fund a lifestyle close to the one enjoyed when at work but also from people on low retirement incomes.
Providers have responded to the new circumstances by developing product options, such as phased drawdown options or monthly income plans, more attuned to individuals requirements.
However, the products are complex and the report reiterates the need for homeowners to seek expert advice even though there is a relative shortage of specialist advisers and solicitors dealing with this type of work.
The report examines the two types of equity release home reversion schemes and lifetime mortgages. It also emphasises the importance of choosing a lifetime mortgage that has a no negative equity guarantee.
David Black, head of banking at Defaqto and author of the report, says: It’s an unfortunate fact of life that most people will have a significant shortfall between their retirement income and their expected spending needs if they wish to retain their current lifestyle.
The chance to tap into the equity built up in their property represents a relatively easy way to produce an additional income stream or to get a cash lump sum. Clearly there may be many possible alternatives for the consumer that should be investigated but it will be difficult for many to find such an agreeable solution.
It is likely that the use of equity release will become even more important in the future and this may eventually be by compulsion, as governments cast around for ways to supplement state pensions.
Increasing life expectancy, insufficient pension contributions, declining state pensions, increased taxation, lower interest rates on savings, poor stock market returns, increasing care home costs and low annuity rates are other factors increasing the attraction of equity release, the report adds.
The increasing levels of debt that people carry into retirement is another factor driving equity release as homeowners use their major asset to consolidate debts once they have a reduced income from which to maintain repayments.
Figures from Datamonitor show around 12.9 million people expect to use property to fund at least part of their retirement and that 1.8 million will rely on it to make up over 50% of their retirement income.