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Equity release better option than downsizing for majority of borrowers – Responsible Life

  • 06/06/2022
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Equity release better option than downsizing for majority of borrowers – Responsible Life
Some 81 per cent of equity release borrowers would have been financially worse off if they downsized instead, research has found.

A study by later life mortgage broker Responsible Life found that using a lifetime mortgage increased a borrower’s wealth by an average of 0.24 per cent per year. 

The firm looked at 230 equity release transactions from 2013 to 2015. It found that when compared to downsizing to a smaller and cheaper property, homeowners were usually financially better off because of the rising value of their homes. 

The broker analysed the house price performance since completion in each customer’s local authority. It then created a downsizing scenario for every borrower that left them with the same amount of money they released using their lifetime mortgage. The firm also factored in the cost of moving including legal fees, moving costs, stamp duty and estate agent fees.  

The firm then assessed the local performance of the housing market then applied this to the downsized property valuation, to compare the financial position of customers across both scenarios. 

The net worth of borrowers was found to be an average of 1.85 per cent higher than if they had downsized. This was equivalent to £1,694 a year on average. When looking specifically at those who saw increases in the value of their homes, this gain rose to £2,420 each year. 

Among the cases looked at, the largest projected gain in net wealth when compared to downsizing was £262,328 over eight-and-a-half years. The client’s property was already high in value and is currently worth £5m. 

The largest decline in net wealth was £172,184 and this was another case where the client’s home was already high in value. 

The firm found that house price growth in the studied areas averaged out at 0.41 per cent yearly, suggesting that even small gains worked in the favour of homeowners. 

Steve Wilkie, executive chairman of Responsible Life, said: “This research is a real eye-opener. Downsizing has historically been the default option for many people wanting more money in retirement, but our study shows this can be a false economy.  

“The vast majority of borrowers in the study would have been worse off had they downsized. Thanks to the strength of the UK housing market, this is largely because they would have surrendered a larger asset for a smaller property that would have appreciated less over time.” 

He added: “Our analysis shows that unlocking property wealth using a lifetime mortgage can make the most financial sense over the long term, giving homeowners every reason to stay in a treasured family home without having to sacrifice their quality of life in retirement.” 

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