Warning as £12billion is withdrawn from homes by over-55s in ‘equity release‘ boom amid fears some may not realise the high interest risks

The  boom in equity release has seen the over-55s withdraw £12.1billion from the value of their homes in just five years.

Campaigners fear some borrowers are being pressured into taking money without understanding the risks.

Demand for equity release deals is at record levels as people retire with less secure pensions and see care costs rocket, forcing them to raise money elsewhere.

The money is being used for everything from home extensions to helping grandchildren get on the property ladder.

A total of £4billion of equity was withdrawn from borrowers’ homes last year alone. The money is repaid along with interest when the owners die or go into long-term residential care.

This figure is four times higher than it was in 2012, and is forecast to surge again to reach £5billion this year.

Equity release allows older people to borrow money against the value of their property without having to sell it.

But interest rates are much higher than for normal mortgages, at an average of 5.1 per cent, and charges can quickly mount. 

Compound interest is typically charged on equity release deals, meaning that customers pay interest on the initial amount borrowed, as well as interest on this interest.

It means that when a borrower dies, their family can be left with very little to inherit.

For example, if someone borrowed £50,000 at the age of 60 at the average rate, their estate would owe £173,000 if they died aged 85. 

In some cases the lender may be entitled to the entire value of the property, leaving those hoping to inherit with nothing. James Daley, of consumer group Fairer Finance, said the Financial Conduct Authority watchdog should investigate equity release.

‘It’s always alarming when a sector is growing at this kind of rapid pace – you just worry about how that growth is being generated,’ he said. 

‘Normally, rapid growth is generated by some kind of high-pressure selling, and on a complex product like equity release, the worry is that people aren’t being made sufficiently aware of the risks and the alternatives available.

‘It’s hard to imagine how this lending could have grown quite so rapidly without some highly effective marketing efforts. It is probably time for the FCA to have another look at this market.’ In 2013 equity release withdrawals broke the £1billion mark for the first time.

The annual total borrowed reached £2billion three years later in 2016, before hitting £3.1billion in 2017 and then £4billion last year, according to figures from trade body the Equity Release Council.

A total of £936.2million was withdrawn in the first three months of this year alone.

Separate figures from research firm Mintel forecast that a record £5billion could be accessed through equity release this year.

Among the over-75s, 42 per cent of borrowers in the first quarter of 2019 said they would use the cash to fund costs associated with old age, such as adapting their property or paying for home help.

Around 20,400 customers borrowed against their homes in the first three months of this year, with the average customer taking out a lump sum of £97,763, the Equity Release Council said.

Its chairman, David Burrowes, said there is extremely tough protection for customers.

‘Recent growth from a low base has established equity release as part of mainstream financial planning conversations, as the logical result of an ageing population wishing to use one of its main sources of wealth – money invested in property – to meet increasing social needs,’ he said.

‘The average amounts of money withdrawn remain stable and annual market activity represents a tiny fraction of the nation’s total housing wealth.

‘As every individual circumstance is different, it is important that people consider their options, supported by financial and legal advice, to decide whether equity release is right for them.’