Equity release is more popular nowadays because a lot of older people have most of their money tied up in their property. Property values have risen dramatically in the UK leading people to become asset rich but cash flow poor. Releasing equity makes sense but you need to know its true cost. Also, a lot of elderly people live alone with their domestic cat companions. They might like to provide their cat with a beautiful new, top quality, no expense spared catio by building an extension to their home. Why not? They are worth it! I thought I’d work out the cost of doing this using equity release. It’s not very complicated so you don’t have to do lots of maths or be good with figures to work it out. My figures are for UK citizens but the same principles apply to any country where equity release is available.
The cost of an extension UK 2020
The cost of an extension in the UK in 2020 is about £1,500 for every square metre. So an extension which is 5 m x 5 m or 25 m² costs £37,500. I’ll round that up to £40,000 under an equity release scheme. Equity release is also called a “lifetime mortgage” because you don’t pay it back until you die! That’s the plan in any case. Although you can pay some of it back under some schemes to keep the interest rates down.
Equity release interest payments
Although the interest payments that I have seen online vary between about 2.5 and 3.1%, to be on the conservative side in this calculation I will assume that the interest rate is 5%. The first point to note is that this is compound interest. This means that the interest accrued in the first year is added to the amount borrowed and then the interest on the second year is calculated on the basis of the amount borrowed plus the amount of interest accrued during the first year.
For example, on a £40,000 loan at 5% interest after the first year you will owe £42,000 to the company providing the equity release mortgage. This represents the £40,000 loan plus the first years interest payment of £2,000 (5% of £40k). You then pay 5% interest on £42,000. The interest payment is £2,100 and this amount is added to the existing total which is £42,000 plus £2,100 equalling £44,100. In the third year the interest charged will be 5% on £44,100 which is £2,205. This then makes the balance outstanding £44,100 plus £2205 making £46,305. And so on. You can see that the interest payments go up each year because they relate to a higher amount outstanding. This is called compound interest.
You can offset this gradual increase which may worry some people by borrowing the full £40,000 but only using half of it, say £20,000 for the extension. You can then dip into the remaining £20,000 as and when you think you need it. This clearly reduces interest payments.
Some plans allow you to repay a percentage of your loan annually without any penalty up to 15% of the original amount borrowed. You can therefore repay the interest charged each year to prevent compound interest occurring. Or you can pay some of the interest amount accruing each year which will lessen the effect of compound interest. And thirdly, you can pay more than the interest charge which will reduce the interest payments.
Another way to take out a lifetime mortgage is to buy an interest-only plan. If you borrow £40,000 under an interest-only plan the final amount to be repaid would still be £40,000. But you would pay the interest as and when required under the terms and conditions. Some plans allow you to stop and start interest payments as and when you want to.
If you are concerned about letting your cat go outside because of the dangers you might consider an extension/catio. By this I mean an extension to your home creating a room which is open at one end (and/or the other sides) with a wire mesh and which is for the exclusive use of your beloved cat. She deserves it.
Catios or cat enclosures are the best compromise in a modern world between allowing a domestic cat the enjoyment of being outside together with discharging a cat owner’s responsibility of keeping their cat safe. A third benefit is that the arrangement protects wildlife. This is becoming an issue because of an increased sensitivity by world citizens of the need to protect the environment and nature.
There are obviously cheaper ways of building a catio. This is an example which may be dual purpose or partly used by humans too!