Understanding the impact of inflation on equity release

How can inflation affect your equity release plan?

Written in line with our editorial policy.

With UK inflation now at around 10%, it’s something that needs careful thought in relation to many financial planning decisions. That’s certainly true of equity release, because today’s high inflation could potentially eat into any money you release from your home. But there are ways to minimise the impact of inflation on your equity release plan.

Various methods measure inflation, including the Consumer Price Index (CPI) and the Retail Price Index (RPI). But however it’s measured at the moment, the result is the same: UK inflation is running at about 10% per year.

Therefore, it is crucial for homeowners to consider the impact of inflation when considering an equity release plan. It is important to choose a plan that takes into account the potential impact of inflation on equity release money and offers measures to mitigate the risks associated with inflation. 

With the potential problems caused by inflation in relation to equity release in mind, in this article we’ll look at:

• Why is inflation relevant to equity release?
• Can you reduce the impact of inflation on equity release funds?
• Where can you get advice to help reduce the impact of inflation on your equity release plan?

At Equity Release Wise, we bring you access to the best equity release deals from leading providers through our selected equity release advisers. Simply call us on 0808 178 3055 or request a call back for a time that suits you, and we’ll arrange an appointment. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.

Why is inflation relevant to equity release?

It’s important to understand the impact of inflation when considering an equity release plan. Inflation can erode the value of the tax-free cash release from your property. This in turn can impact the overall value of your equity release plan.

Currently, with inflation at around 10%, it can seriously erode the purchasing power of any savings you might have. In other words, high inflation decreases the value of your money over time.

If a homeowner receives a lump sum payment from an equity release plan and doesn’t spend it right away, the real terms value of that payment may decrease over time due to inflation. This is because inflation causes a general increase in prices and the overall cost of living.

Even if you place your equity release cash in an interest-paying savings account, it’s unlikely that the amount of interest you receive will match inflation. That’s why the value of your cash release will reduce over time in real terms; after a while it will be worth less than when you released it. In addition, the effect of compound interest on your loan is likely to negate any gains you might make from putting your money in savings. 

Can you reduce the impact of inflation on equity release funds?

There are two main types of equity release plans: home reversion plans and lifetime mortgages. 

A lifetime mortgage (the most popular form of equity release) involves borrowing money against the value of your property, in the form of a secured loan. The loan and accrued interest are repaid when the property is sold, so there are no mandatory monthly repayments with this type of plan.

There is a type of plan that offers a partial solution to the negative impact of inflation on equity release cash. This is known as a drawdown lifetime mortgage and lets you take your money in stages, rather than as a one-off lump sum.

By taking however much you need, as and when you need it, you avoid or reduce the problem of a large lump sum being eroded by inflation while sitting in a savings account. In fact, the general guidance with equity release is to avoid taking cash purely to place into savings. Even when inflation is low this would erode the value of your money.

Borrowing only what is necessary doesn’t just reduce the impact of inflation on equity release plans. A drawdown plan can also help to reduce the overall costs associated with the plan, because it means that the plan will accrue less interest. 

This is because lenders only charge interest on the amount borrowed, as and when it’s borrowed. This is in contrast to a lump sum lifetime mortgage, where interest is charged on all the money you release, from the moment you receive the lump sum.

Where can you get advice to help reduce the impact of inflation on your equity release plan?

Equity release is always something that should be considered very carefully, and this is certainly true when it comes to understanding the impact of inflation on equity release plans and the strategies available to manage inflation risk. This is why here at Equity Release Wise we work with advisers who specialise in this form of later life lending.

We would be delighted to arrange an initial telephone appointment with one of our selected advisers. They can provide the information and advice you need, and find you the best equity release deals from leading providers. This includes obtaining quotes for drawdown lifetime mortgages that potentially reduce the effect of inflation on the money you release.

Simply call us on 0808 178 3055 or request a call back and we’ll arrange a telephone appointment with an adviser. There is no obligation to proceed or a fee for this initial help. Only if you proceed with an equity release plan would you pay a fee, which will be explained to you by your adviser in advance.