In a challenging financial landscape where homeownership dreams for the younger generation seem increasingly distant, equity release presents a viable solution. With the number of over-65s in millionaire households quadrupling in a decade, the focus is on bridging the widening intergenerational wealth chasm.
But what role does equity release play in the intergenerational wealth gap?
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Key Points:
- Equity release emerges as a powerful tool for intergenerational wealth transfer.
- The number of over-65s living in millionaire households has nearly quadrupled in a decade.
- Only 1.2% of Brits aged 25-34 currently own a home.
- 25% of those under 25 turn to the Bank of Mum and Dad for homeownership support.
- Equity release market saw a 36% increase, with £3.1bn released in the first half of the previous year.
What is Equity Release
Equity release is a financial product tailored for homeowners, typically over the age of 55. It allows individuals to access or ‘release’ some of the capital (or equity) tied up in their property without having to sell or move out.
Essentially, equity release provides a way to unlock the value of your home and turn it into a cash lump sum or a regular income stream. This can be particularly beneficial for retirees looking to supplement their pension or fund home improvements, while still retaining the right to live in their property.
There are two main types of equity release:
Lifetime Mortgages
Lifetime mortgages allow you to borrow against the value of your home and pay back the loan plus interest when the property is sold, usually upon death or moving into long-term care.
Home Reversion Plans
Home reversion plans where you sell a portion or all of your home to a provider in return for a lump sum or regular payments, with the guarantee of lifetime tenancy. It’s essential to seek professional advice before committing to equity release, ensuring a clear understanding of its implications and ensuring it aligns with one’s financial goals.
What is the Intergenerational Wealth Gap
The intergenerational wealth gap refers to the economic disparity between different generations, often observed between older and younger age groups. It highlights how financial conditions, assets, and opportunities differ across generations due to various factors, including changes in property prices, wage stagnation, education costs, and pension provisions.
In many countries, older generations, having benefited from booming property markets, secure job markets, and generous pension schemes, have accumulated significant wealth.
In contrast, younger generations face challenges like skyrocketing property prices, student loan debt, and less job security, making it harder for them to achieve the same financial milestones at the same age as their parents or grandparents.
This widening gap has implications for social mobility, economic growth, and even societal cohesion, as it can foster feelings of inequity and generational tension.
Home Ownership Challenges for Young People
According to YouGov research, nearly half of all parents (49%) in the UK believe they will need to assist their children with some form of inheritance for them to purchase a home.
With the rising cost of living adding further pressure to household budgets, the equity release market has become a key avenue for those in need of a vital cash injection, after a record total of £3.1bn was released in the first half of last year – up from 36% in 2021 – according to the Equity Release Council.
The Impact of Equity Release
Equity release has long been championed by retirement experts and financial planners. An examination of data from the Intergenerational Foundation showcases the evolution of property wealth:
| Year | Over-65s in Millionaire Households |
|---|---|
| 2008 | 846,000 |
| A decade later | 3,137,000 |
Meanwhile, the younger generation grapples with homeownership challenges. With just 1.2% of 25-34 year-olds owning homes and a quarter of those under 25 leaning on the Bank of Mum and Dad, the need for intergenerational financial support is evident.
Rudy Khaitan, Managing Partner of Senior Capital, the UK’s leading innovator in later-life lending products, made the following comments: “This month’s interest rate rise has dealt yet another significant blow to mortgage holders, with millions already reporting up to a 60% increase in their monthly repayments.
For those who are planning to help members of their family with financial assistance, but are increasingly limited by rising interest rates, equity release can serve as an essential mechanism that could unlock life changing amounts of capital securely.”
“The right equity release mortgage product, particularly those that offer the greatest flexibility through limited prepayment penalties, can be the better option vs a more traditional mortgage when you want to unlock the value in your home without taking on additional monthly repayments.
It allows homeowners to access the equity built up in their property, providing a tax-free lump sum to supplement regular income, whilst still retaining ownership and the right to live in their home for life or until they move into long-term care. This can be particularly advantageous for those who are retired or have limited income, as it offers financial flexibility and stability without the burden of servicing higher mortgage repayments.”
Some Pros of Equity Release
- Fast Access to Capital: Equity release provides homeowners with a lump sum or regular income by unlocking the value tied up in their property.
- Retain Home Ownership: Even after releasing equity, individuals can continue living in their home without any disruptions.
- Tax-Free Funds: The money obtained through equity release is tax-free, allowing homeowners to fully utilise the amount as they see fit.
- Flexible Repayment Options: Many equity release plans don’t require monthly repayments, with the amount owed typically being repaid from the home’s sale when the owner passes away or moves into long-term care.
- Protection against Negative Equity: Most reputable equity release schemes come with a no negative equity guarantee, ensuring that homeowners will never owe more than the value of their home.
Some Cons of Equity Release
- Eroding Inheritance: As equity is released from the property, the potential inheritance value to pass on to heirs can decrease.
- Accumulating Interest: The interest on a lifetime mortgage can compound over time, which means the amount owed can grow rapidly, especially if interest is not paid regularly.
- Reduced State Benefits: Accessing cash from your home might affect your eligibility for means-tested state benefits as you may exceed benefit thresholds.
- Early Repayment Charges: Some equity release plans come with hefty penalties if you decide to repay the loan earlier than agreed.
- Limitation on Future Moves: Equity release can limit your ability to move to another property or downsize, as the new property might not meet the equity release provider’s criteria.