Why it might be a bad idea to use equity release to pay for a vacation

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Homeowners borrowed £111 million against their properties last year to pay for holidays as flight and hotel prices soared.

The share of older homeowners using stock releases to fund a getaway will double year over year from 7% to 14% by 2022, according to data from Key, a stock release company. But financial advisers said it was worrying that people over 55 were ripping money out of their homes to pay for cruises and exotic trips abroad.

Kevin Bailey, of Wessex Investment Management, a financial advisor, said a trip funded by equity release “would turn out to be a very expensive holiday in the long run”.

He added that if a client approached him to free up money “just for a holiday”, he would insist on taking out a loan.

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Andy Wilson, a financial advisor, said that for many vacations, vacations represent “a better life” and in this context, “access to additional but modest funds can make all the difference in the homeowners’ lives.”

However, homeowners should be aware that if they take advantage of the equity release, they will be paying for the holidays for years to come, he added.

Interest on home equity loans rolls up each year and must be repaid with the original loan when the borrower dies or moves into care.

Wilson said the release of equity for vacations “usually forms a small part of a larger release of money that can be used for a variety of purposes.”

The release of equity is mostly used to pay off mortgages and pay off debt, and a much smaller proportion of homeowners take out loans for discretionary expenses, such as vacations.

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Despite the risks of compound interest, thousands of people over 55 chose to pull cash out of their homes to finance the trip of a lifetime, which skyrocketed in price in 2022 due to increased demand and rising inflation.

Demand for travel surged last year due to the easing of Covid-19 restrictions, with EasyJet reporting a 47 per cent year-on-year rise in passenger numbers for October to December.

Research by the consumer group Which? found that the price of a week in Greece this summer is 30% higher than last year, while a holiday in Spain, Italy and Turkey now costs 20% more than last summer.

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Taking out a home equity loan is a huge financial decision and potential borrowers should speak to an advisor and lawyer before proceeding.

Interest rates rose sharply in the wake of Kwasi Kwarteng’s mini budget, which has limited demand for equity releases, but

Mr Wilson said he expects more over-55s to finance holidays with loans once rates have come down.

“Because we also now have higher interest rates, I see less ambition to sail the high seas or spend months in distant locations visiting family,” Wilson said. “I do feel that borrowing for holidays will increase as rates start to come down and people are tired of three years of misery with Covid and rising prices.”

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