Equity release still viable despite falling house prices

06 May 2008 / by Daniela Gieseler
Thousands of pensioners might have to reconsider their immediate retirement plans due to the falling value of their houses, a new study by Prudential reveals.

Those who were planning to sell their homes to release equity this year will have far less money to indulge themselves or their families.

Prudential, one of the biggest providers of private pensions, examined the amount of equity in pensioners' homes, which is the value of the house over and above the outstanding amount of the mortgage.

The research shows that equity in pensioners' homes rose by just 0.3 per cent between October and February – a sharp fall from the previous five months' 2.5 per cent. In four out of the 10 regions in England and Wales the figures even dropped during this period, with Welsh home owners losing an average £3,600.

Although homeowners in other parts of the country are not doing as badly, the report clearly shows that equity is increasing at a much more sluggish pace than in recent years.

Still, Prudential urges pensioners not to be too concerned about the impact of the falling house prices on their property: "It is important that retired homeowners don't lose sight of the bigger picture," Keith Haggart, business director of retirement income at Prudential, emphasises.

He points out that "Most have built up a significant amount of equity in their homes over a number of years so even if property prices do fall, many still have a huge amount of wealth in bricks and mortar."

Consequently, the risk of getting into negative equity is very low. This applies in particular to those owning their property outright, as the value of the house they bought for a few thousand pounds many years ago has meanwhile risen to a six or seven-figure sum.

SHIP, the leading UK body for equity release product providers, also seeks to reassure pensioners, stating that there is no need to abandon the idea of equity release, whether they are considering it imminently or at sometime in the future.

However, SHIP warns people to make sure they consider only those equity release product providers offering crucial guarantees which ensure consumers are protected from falling property prices.

The products should include a 'no negative equity' guarantee, which means consumers will never owe more than what the property is worth, and security of tenure – the right to stay in the property until the owner either dies or moves into long term care.

Andrea Rozario, Director General of SHIP, says: "The current situation in the property market does not mean the door is closing on equity release – far from it. Declining levels of pension investment – by individuals and employers – and the extent to which Britons have in preference invested heavily in property for many years now, mean that equity release will become increasingly important, even if property values do come down from their recent highs for a while."

She also stresses that the long-term prospects are still favourable: "Those looking to the longer term should take comfort in the longer term trend in property values which is always up."

©Fair Investment Company Ltd