The UK property market has been extremely strong for some time now which has prompted many of the so-called “baby boomers” to cash in some of their property chips. A recent report confirmed that equity release schemes are becoming extremely popular amongst the older generation who have seen the value of their property increase dramatically.
In the first quarter of 2011 it is estimated there was just under £200 million was withdrawn via the equity release option. The relevant figure for the first quarter of 2016 stands at a phenomenal £400 million and could yet rise further in the short to medium term. So, why are so many baby boomers cashing in their property chips and what are the long-term consequences?
Helping first-time buyers
A review of the equity release schemes available suggests that many baby boomers are cashing in some of their property chips to help their children climb onto the UK property ladder. We are all aware the difficulties facing first-time buyers as property prices continue to move higher and appear to be coming more detached from household incomes. Indeed over the last few years there has been minimal wage inflation yet property prices have been pushed higher and higher.
When you also take into account the increased deposits required by many mortgage establishments in the UK it perhaps no surprise that parents are cashing in some of their property chips to help their children.
The structure of equity release schemes will vary across the board but they are perhaps not as generous if payments are missed. The main attraction is the fact monthly repayments are not required and the loan is repayable at a later date. However, if the loan repayment is missed and rolled over there will be an array of interest charges which can change the overall benefits.
When you also consider that some homeowners are cashing in their property equity chips to pay off other forms of debt such as credit cards, mortgages, etc there needs to be a note of caution. Unless the initial repayment date is met for the equity release loan this type of arrangement can prove to be expensive.
Why take equity release?
At this moment in time UK base rates are at historic lows, inflation is minimal and the cost of debt has never been lower. Therefore many baby boomers are happy to cash in some of their property chips at current interest rates and either payback the loan in the future or else the liability is repaid when their property is sold, or in the event of death.
There is also the potential for property prices to increase in the future at a greater rate than the interest on equity release loans. This would be the perfect scenario for many people.
There are obvious pros and cons with regards to property equity release schemes and you need to be fully aware of the small print and any penalties should you have trouble repaying the initial loan. Many families will probably consider downsizing alongside property equity release schemes as this may be more beneficial in the longer term. However, while the £400 million released in the first three months of 2016 will help many first-time buyers it is but a drop in the ocean.