Equity release has historically had quite a bad reputation, so many homeowners may be hesitant to take out an equity release loan. But now, thanks to improved regulations and increased protection for homeowners, equity release has become a good potential option for people looking to release money from their property.
According to the Equity Release Council, £3.89bn was released to homeowners in 2020 via equity release, emphasising just how popular it has become.
How does equity release work?
Equity release is available for people over 55 who want to release money from the value of their property. Generally, only homeowners who own the property outright or have only a small amount of the mortgage outstanding will be eligible. The equity release provider buys the property, or a percentage of the property, but allows the person and their family to continue living there.
Typically, the equity release provider will transfer a lump sum of money to the homeowner, or they can draw down regular payments, if that is preferred. The homeowner is allowed to stay in the property until they die, or until they move into long-term care accommodation. Throughout the period that they remain in the property, interest accumulates on the amount borrowed.
When the property is sold, the equity release provider receives their money back, plus the interest that has built up over the period.
Are equity release schemes safe?
In the 1990s, the reputation of the equity release market was tainted by the mis-selling of products, but the sector has experienced a remarkable turnaround, with strict regulations introduced to ensure that homeowners are much more protected.
Before you agree to take out equity release, you should check that the company is registered with the Financial Conduct Authority and that they are also members of the Equity Release Council. This will ensure that you are protected and can claim compensation if you are mis-sold a product.
One of the biggest risks of taking out an equity release product is that property value can fall, resulting in negative equity. Without a ‘no negative equity’ guarantee in place, this could mean that even after the property is sold, more money would be owed to the lender. So, make sure that the lender provides a ‘no negative equity’ guarantee.
Advantages of equity release
There are many different benefits to choosing equity release over other types of financial products, with the fact that homeowners are able to remain living in the property being one of the key attractions.
Some homeowners choose equity release so that they are able to go on regular holidays, or so that they can provide a ‘living inheritance’ to their family, without inheritance tax. The money may be used for home improvements or even tax -free living expenses, if they want to boost their pension payments, for example.
Equity release has no monthly repayments, which is another key benefit for many people who do not want to take out a loan with the commitment to monthly repayments. Another benefit is that interest rates are fixed, so you do not have to worry that interest will go up if the Bank of England base rate goes up.
Potential disadvantages of equity release
As we mentioned above, the possibility of negative equity is one of the big risks with equity release, but you can ensure this does not affect you or your family by choosing a lender with a ‘no negative equity’ guarantee.
You should also be aware that there can be income tax implications, depending on the amount you receive and your financial situation, so you should get advice from an accountant if you are not sure how you will be impacted in terms of tax. You could also lose means-tested benefits, again, this will depend on how much you are borrowing and your financial situation.
The main disadvantage of equity release is that it reduces the inheritance that you leave to your beneficiaries, so you must decide whether that is an important factor. With most lenders, you can ring-fence an amount of inheritance to ensure that your family is guaranteed a certain amount. If you are using the equity release to provide financial support to your family while you are still alive, then the reduction in inheritance is not going to be a disadvantage, they are just receiving the money earlier.
Things to consider:
Before you go ahead with an equity release product, you should take time to review your options and be completely certain that it is the right financial option for you and your family.
Just like any other service or lender, it’s important to choose your options wisely and avoid certain equity release companies.
Some of the things you should consider:
- Check that they are registered with the FCA and are members of the ERC.
- Make sure they offer a ‘no negative equity’ guarantee.
- Ensure you have a right to remain and a right to move.
- Compare like-for-like across different deals.
- Check if there are any early repayment charges.
- Avoid lenders who offer a loan without understanding your circumstances.
- Check all of the costs included in the equity release, such as valuation fees, arrangement fees, legal fees etc.
Checking that you have a right to move is very important, as your circumstances might change and even if you had not planned to move house, you may find you need to or want to. Most lenders will allow you to move the equity release over to another property, so you should check if this is possible, along with whether there are any early repayment charges applicable.
Taking out an equity release product is not as risky as it was once thought to be, however it is not suitable for everyone. If you are interested in equity release, using a reputable broker can help you to ensure that you only choose equity release if it is the best option for your specific circumstances.