Why equity release is increasingly relevant for high net worth clients
Years of solid house price growth in the UK has left many individuals and couples with a very large sum of money locked in their homes. Equity release is, of course, one way of unlocking this accumulated wealth without the substantial disruption of leaving a much loved home.
However, equity release is often seen through a narrow lens of financial distress, an option of last resort where clients cannot make ends meet. In contrast, particularly in today’s low interest rate environment, IFAs should see equity release as a practical financial planning tool, even where a client is wealthy. Let’s take a look.
UK house prices have had a long period of solid growth over the past 20 years, allowing home owners to benefit from large rises in the valuations of their homes, meaning mortgage-free over 55s are potentially sitting on large amounts of equity tied up in their home.
The equity release market is growing rapidly
In turn, the amount of money lent through equity release plans is rising fast. With £1.06bn lent in 20131, the total amount released, based on previous growth, is on course to reach around £7-8bn by 2021.
Equity release could benefit high net worth clients too
Indeed, an IFA’s high net worth clients in particular stand to gain substantially from harnessing the equity in their homes. With the large sums available IFAs should consider these four scenarios when dealing with a wealthy client that owns property:
- Equity release could enhance the lifestyle of a wealthy client
It is not uncommon for people over 55 to be asset-rich, but relatively cash poor. Where clients are making ends meet without truly enjoying their wealth, IFAs can recommend equity release as an option to help boost a client’s lifestyle without the disruption of selling up and downsizing.
- A more flexible approach to retirement income
With the advent of pension freedoms, clients now have more flexibility over how and when they access the cash in their pension funds. Using housing wealth to complement a retirement income strategy can be a way of balancing the changing needs and potential income gaps a client faces once they stop full-time work.
The funds released through an equity release plan are tax-free, regardless of whether a client chooses to release the funds in a lump sum, or as a series of smaller payments – and irrespective of how the money is spent.
- Clients in the process of divorce
Divorce also carries difficult financial implications, particularly where a couple has shared a home over many years. Where an IFA has a client that is confronted with the loss of their home they may want to recommend equity release as a way forward.
Circumstances permitting, equity release can help a client undergoing divorce proceedings to meet the requirements of a divorce settlement, without needing to sell their residence. Indeed, an equity release plan could provide a relatively pain-free way of moving on from a challenging time in a client’s life.
- Gifting and inheritance
Increasingly, equity release is being used by wealthier clients as a means to make outright gifts to children and grandchildren - a ‘living inheritance’ that ensures they see the benefits of their loved ones enjoying the money. This money is often being used as a deposit on a first home to help children not only afford the property they want but to get a much cheaper mortgage deal at the same time.
Clearly, equity release has a range of uses for high net worth clients whether it’s to enhance their retirement lifestyle, help them deal with marital or health changes or indeed to provide a ‘living inheritance’.