Are Equity Release Loans Affected by Low Interest Rates?

Equity release schemes allow elderly persons to receive an income from their home when it has risen in value, which is critical in today’s low interest rate environment where savings rates are so low.

There are three types of equity release schemes: home income plans, mortgage style and shared ownership.

The mortgage style loans allow those persons over 60 to borrow cash between 18 pc and 50 pc of the value of their home depending on their age.

According to research falling stock markets and low interest rates have taken their toll on retirement income in the past few years, and this has contributed to a sharp rise in unsecured lending. Since 1996 unsecured borrowing by pensioners has climbed by 71% with more than a third of these pensioners now using credit cards up from a quarter only four years ago.

Several hundreds of thousands of pensioners are being forced to borrow money as a supplement to their diminishing pensions and one of the major insurance companies in the UK, Prudential, recently unveiled an equity release program in response to the great demand from pensioners were facing large cuts in their retirement income.

Additionally, those approaching retirement age continued to carry high levels of debt, an estimated 60,000 people between ages 55 and 64 have individual deaths of Pounds 50,000 or more. The Prudential insurance company points out that despite the rise in debts among pensioners, these people continue to hold equity worth Pounds 369 billion contained in their properties.

The number of pensioners using equity release to supplement their income has nearly quadrupled since the beginning of this year according to the numbers from the Council of Mortgage Lenders. The national consumer Council and the consumers Association points out that a pensioner should speak out independent legal advice before taking out an equity release scheme. A series of financial scandals at the beginning of 1990 left numerous pensioners financially broken.

Prudential equity release program, which is offered through a link with Northern Rock, is endorsed by Safe Home Income Plans, the organization that sets codes of practice for the industry.

What it boils down to is more and more homeowners are withdrawing equity from their properties and given the low interest rates an extra $25k, $50k or even $100k doesn’t seem to mean all that much when you break it down into extra monthly payments; however debt is a debt. The fact that the debt is somehow ‘cheap’ in today’s terms does not mean it is always going to remain so.

This extra money that homeowners are taking out of their houses is being spent on holidays, new cars and home improvements to name but only a few of the many things home equity money could be spent for. This has a knock on effect within the economy as more money is being spent, keeping more people employed in bringing in more taxes for the government and ultimately increasing the demand for houses and at the same time because this factor is also pushing up the prices it is also decreasing the supply of houses.

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