Is equity release a good idea?

Because life expectancy and retirement age have both increased over the last few years, people in the UK are living and working longer than ever before. This gives you more options to access investments you have made during your working life.

But I haven’t made any investments. That is where you are mistaken, you see your largest single investment is your home, and most homes have risen in value significantly over the last few decades – most likely including yours.

If you are over 55, own your own home, and you’re looking for a tax-free lump sum of cash, then you have probably considered taking an equity release plan. Lifetime mortgages are a form of equity release and can be a good way of unlocking the money that’s tied up in your home, without having to move out.

However, lifetime mortgages are a risky and expensive way to raise cash, due to the current interest rates being the highest they’ve been in years, so you should never take one without seeking independent professional advice first. One of the biggest pitfalls of equity release is that it is tied to interest rates.

You can use our compound interest calculator to see just how much interest accrues on equity released from your home.

To give you an unbiased overview of the equity release pros and cons, and potential pitfalls and answer the most asked question – is equity release a good idea? Read on.

Perhaps rather than asking yourself if equity release is a good idea? You should instead ask the question…

Is equity release a good idea for me?

Deciding if equity release is right for you will depend on your circumstances.

For example, if you have enough savings that you can you use to help boost your retirement income, or you are willing and able to continue working then releasing equity might not be the right option for you and a financial adviser will most likely advise against it as to not mis-sell a product to you. One of the potential pitfalls of equity release would be releasing equity from your home when you have savings in the bank you could use.

Similarly, if you would prefer to sell your home and downsize to somewhere the property values are lower to free up extra money, then this might be a less expensive alternative to equity release.

Another reason equity release might not be suitable for you is if you want to leave as much of your estate as possible for your beneficiaries to inherit. One of the most well-known equity release horror stories is that you lose your house (but this isn’t true – read on).

On the other hand, if your savings (if any) are not going to be enough to meet your needs, you can’t or don’t want to move or downsize and you are not bothered about the amount you leave in your estate, then equity release might be a good idea for you.

But before you rush into anything and potentially start your own equity release horror story, there are some important things you might need to consider before taking out a plan.

Are there any equity release companies to avoid?

To avoid falling foul of potential equity release scams you should avoid equity release companies that are not members of the Equity Release Council and only deal with regulated lenders who offer plans that meet their product standards.

The following companies are Equity Release Council, provider members:

• • Aviva
  • Canada Life
  • Hodge
  • Just Retirement
  • Legal & General
  • LV=
  • more2life
  • Nationwide Building Society
  • OneFamily
  • Responsible Lending
  • Retirement Bridge
  • Scottish Widows
  • Standard Life

By applying to lenders who are members of the Equity Release Council, you will be protected by their product standards.

A further level of security you have is the Financial Conduct Authority (FCA). The FCA regulates all legally compliant equity release advisers. Therefore, if you were to choose any equity release companies to avoid, they would be ones not listed on the FCA register.

You can check the status of a firm on the FCA register here.

Here is a list of red flags to watch out for when looking for equity release companies to avoid, steer clear of any who do any of the following:

• • Do not offer you a ‘no negative equity guarantee’.
  • Do not offer capped or fixed interest rates on a lifetime mortgage.
  • Do not let you stay living in your home until you die or until you move into permanent residential care.
  • Do not offer you the right to move into another property should you choose to.

If for any reason you feel pressured or uncomfortable then do not proceed, take a step back and consult with your friends and family and seek professional assistance elsewhere. Any firm that puts pressure on you to sign up or get a quote would most certainly be one of the equity release companies to avoid – genuine companies will be there to help you, discuss your options and work at your pace.

Equity release horror stories

18% of homeowners aged over 55 surveyed said they had been put off lifetime mortgages due to equity release horror stories they had heard according to a recent study. 9% were concerned about negative equity and 22% were worried they would no longer own their own home – this is one of the most popular equity release horror stories we have heard.

According to the research, the most popular equity release horror story is that almost a quarter of homeowners aged over 55 were worried that they would no longer own their own home if they took out an equity release plan.

If you take out a lifetime mortgage you will still own 100% of your home, plus, one of the main safeguards put in place by the Equity Release Council is that you have the right to stay living in your home until you die, decide to move, or go into long-term care.

Another one of the well-documented equity release horror stories is when the interest charged surpasses the value of the property – also known as negative equity.

Negative equity is the term used to describe when the borrower owes more than the property’s actual value.

Thankfully, the Equity Release Council has a set of standards that all equity release providers must adhere to, which includes their ‘no negative equity guarantee’. This horror story can be laid to rest if you consult with financial advisers and lenders who are members of the Equity Release Council.

Data Source: https://www.financialreporter.co.uk

Little-known truths about equity release

According to the same study, 67% of homeowners aged over 55 admit they aren’t clear about what equity release is, and only 8% understood the difference between a lifetime mortgage and a home reversion plan.

We have already discussed negative equity and retaining home ownership above, so what are the other most popular misunderstood equity release facts and misconceptions?

Your family won’t get an inheritance

It is a fact, and one of the pitfalls of equity release, that your family may not inherit as much from your estate if you take equity release out on your home. But, after you die, if your property is sold for the best price it can get, any money left after the loan and interest have been paid will go to your beneficiaries. You can also safeguard a certain percentage of your property sale proceedings to go into your estate with a feature called an ‘Inheritance Guarantee.

You can’t sell your house

Even after you take out a lifetime mortgage, it doesn’t mean you can’t move home if you want to. As long as the new home you wish to buy meets the lender’s eligibility criteria, you can transfer your lifetime mortgage. If your new property does not meet the lender’s criteria, you will need to settle the outstanding loan in full (which may incur an early repayment charge).

All lifetime mortgages approved by the Equity Release Council must guarantee that the borrower will be able to move with their equity release plan (as long as the lender’s criteria are met).

You must take a lump sum

Contrary to popular equity release myths, lifetime mortgages don’t always have to pay out a lump sum. There is an option available called a drawdown facility, which is when you take an initial sum and can access further smaller amounts when you need them. Drawdown equity release might be of interest to you if you don’t want to take out a large amount of cash in one go, which in turn can save you money. Another consideration why you might choose a drawdown facility is to not become ineligible for any means-tested benefits.

An ERC-regulated financial adviser will be able to discuss which type of equity release is best for you.

You need to be retired to benefit from equity release

Most equity release providers allow you to take a lifetime mortgage as long as you (or your spouse, whoever is youngest) are 55 or older, your property is worth at least £75,000 and it is your main UK residence.

Equity release pros and cons

It is safe to say that you can ask questions like ‘what is the catch with equity release?’ and ‘is equity release safe?’ as it is not without its risks, but it is still a viable option to consider if you want some extra money. But, first take a look at the main equity release pros and cons.

Is equity release safe?

Yes – equity release is safe. If it is from a company that is regulated by the Financial Conduct Authority (FCA) and a member of the Equity Release Council (ERC).

Their rules and safeguards ensure that you will always own your home and will retain the flexibility to move. In addition, all FCA and ERC-governed lifetime mortgages come with a no negative equity guarantee.

Look out for the Equity Release Council member badge (see above) on the websites of any adviser, provider, or solicitor you deal with.

More ways the Equity Release Council’s Code of Conduct protects you:

• • Interest rates should be fixed and there must be an upper limit or cap that is fixed for variable rates for the lifetime of the loan
  • You must receive financial and legal advice.

Key Takeaways

• Equity release can be a good way of unlocking the money tied up in your home without having to move out.
• However, it is a risky and expensive way to raise cash due to the high interest rates.
• Deciding if equity release is right for you will depend on your circumstances, such as if you have enough savings to boost your retirement income, if you prefer to downsize to somewhere with lower property values, or if you are not bothered about leaving an estate for your beneficiaries.
• To avoid equity release scams, you should only deal with regulated lenders who offer plans that meet the Equity Release Council’s product standards.
• Common equity release horror stories, such as losing your home or negative equity, are not true if you consult with financial advisers and lenders who are members of the Equity Release Council.
• Misunderstood facts and misconceptions about equity release include the ability to sell your house, the option to take a drawdown facility instead of a lump sum, and the eligibility to take a lifetime mortgage even if you are not yet retired.
• Equity release is safe if it is from a company that is regulated by the Financial Conduct Authority and a member of the Equity Release Council, which comes with a no negative equity guarantee and fixed interest rates.