Why using equity release to pay for a holiday might be a bad idea

ice cream cone upside down on a beach with a small umbrella
ice cream cone upside down on a beach with a small umbrella

Homeowners borrowed £111m against their properties to pay for holidays last year as the price of flights and hotels soared.

The proportion of older homeowners using equity release to fund a getaway doubled year-on-year from 7pc to 14pc in 2022, according to data from equity release firm Key. But financial advisers said it was concerning that over-55s were ripping equity from their homes to pay for cruises and exotic trips abroad.

Kevin Bailey, of Wessex Investment Management, a financial adviser, said that a trip funded by equity release "would prove to be a very expensive holiday in the long run".

He added that if a client approached him looking to free up cash "just for a holiday", he would urge against taking out a loan.

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

However, homeowners must be aware that if they use equity release they will be paying for the holiday for years to come, he added.

The interest on equity release loans rolls up each year and must be paid back with the original loan when the borrower either dies or moves into care.

Mr Wilson said releasing equity for holidays "usually forms a small part of a larger release of money to be used for a variety of purposes".

Equity release is most often used to repay mortgages and clear debts and a far smaller proportion of homeowners take out loans for discretionary spending such as holidays.

Despite the risks of compound interest, thousands of over-55s chose to take cash out of their homes to fund the trip of a lifetime, which leapt up in cost in 2022 due to heightened demand and soaring inflation.

Travel demand soared last year due to the easing of Covid-19 restrictions, with EasyJet reporting a 47pc year-on-year increase in passenger numbers for October to December.

Research by the consumer group Which? found that the price of a week in Greece this summer has jumped 30pc year-on-year while a holiday in Spain, Italy and Turkey now costs 20pc more than it did last summer.

Taking out an equity release loan is a huge financial decision and prospective borrowers are required to speak to an adviser and a solicitor before going ahead.

Interest rates surged in the aftermath of Kwasi Kwarteng’s mini-budget, which has curtailed demand for equity release, but

Mr Wilson said he expects more over-55s to fund holidays with loans once rates have dropped.

“As we also now have higher interest rates, I am seeing less ambition to sail the high seas or spend months in far flung locations visiting family,” Mr Wilson said. “I do feel that borrowing for holidays will increase when rates start to fall, and people are fed up with three years of misery with Covid and rising prices.”

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