Is Equity Release a Con? Quick Analysis

"Are you asking, 'Is equity release a con?' You're not alone. This is a common worry for many people. But don't worry, you're in the right place for answers.

In this easy-to-read guide, we’ll cover:

• What equity release is and who can get it.
• How to keep your home safe when you release equity.
• The best ways to use the money from equity release.
• How to get a fair quote for equity release.
• What to watch out for to avoid equity release scams.

Equity release can seem scary. You may be worried about losing your home or getting tricked, but with the right knowledge, you can make safe choices. We understand your worries and are here to help.

Remember, the more you know, the safer you are. So, let’s get started.”

Is equity release a con?

Equity release is a regulated product category, but scams, impersonation and unsuitable advice can still occur. Verify the firm and the actual product before proceeding.

The reason that they are so expensive to repay is that the lenders need to make sure they make a profit on the credit agreement, and they must simultaneously protect themselves against the potential for your home to decrease in value. 

Many of the interest rates applied to applicable equity release plans are no more expensive than the rates on credit cards and personal loans. In fact, they are often cheaper. But it is the fact that the interest typically builds up for a longer period which makes them expensive. 

Is it a good idea to do equity release?

Suitability depends on current needs, resources and alternatives. Earlier pension planning does not guarantee that equity release will never be considered or needed.

Nevertheless, for some people in certain situations can be a very good idea to enhance the quality of their life. The decision is always made more difficult if you have loved ones relying on receiving an inheritance from you.

What can equity release be spent on?

Permitted use depends on provider terms. Existing secured debts normally have to be cleared at completion, reducing the cash available for other purposes.

Most equity release plans are used to increase the quality of later life and fund retirement. This may mean paying general living expenses, or it could mean paying for home renovations, private healthcare, holidays and more. Some decide to give away their money to family as a type of early inheritance that can be used to start a business or be used as a house deposit. 

What is the catch with equity release?

Even after advice, equity release has material costs and risks. Ensure these and the alternatives are explained clearly.

But the generic catch with equity release is that these loans are expensive to repay. Any equity release product can cost more than double to pay back. And this has an impact on how much wealth you leave behind for loved ones. 

A no-negative-equity guarantee does not stop interest or debt growth. It limits repayment from sale proceeds when its conditions apply.

Do you need financial advice before applying for equity release?

The best way of knowing whether equity release is a good idea or not is to seek independent financial advice. You should opt for an equity release adviser who specialises in this niche of finance compared to generic financial services. 

You are required to use an equity release adviser before making a decision. Sometimes lenders will offer the services of their own advisers, which may need to be paid for as well. You do not have to use the in-house advisers of lenders, and you can use independent advisers who may also offer a credit brokerage service to help find the best deals. 

Only trust lenders regulated by the Financial Conduct Authority

Verify the firm’s identity, contact details and relevant permissions directly on the FCA Register. A legitimate firm need not be registered specifically in England and Wales; UK jurisdictions differ.

Give preference to Equity Release Council lenders

Council membership can indicate adherence to standards, but is not a sure way to exclude scams or clone firms. Independently verify identity and permissions.

They are a voluntary membership group aiming to improve the standards in the equity release industry. They do this by implementing rules and guidelines that all members must follow. To become a member you must be an authorised and regulated company. 

Any equity release provider that joins the Equity Release Council becomes a more attractive lender due to some of the group’s rules. There are many rules that lenders must abide by that give homeowners greater protection, increased assurances and the negative equity guarantee can even save them money!

A lifetime mortgage is a loan; home reversion is a property sale. The guarantees and cost structures differ.

What are the two types of equity release?

An equity release product can be either a lifetime mortgage or a home reversion plan. Lifetime mortgages are far more popular and accessible than home reversion plans. Both are explained here:

How a lifetime mortgage works

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product. The advance depends on current product criteria, not a universal 60% maximum.

Illustration only: £65,000 at 6.4% interest compounded annually without repayments becomes about £137,000 after 12 years, excluding fees.

For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.

Whether a shortfall is covered depends on the guarantee and compliance with its conditions, including the sale requirements.

How a home reversion plan works

A home reversion plan is a sale of part or all of your home, usually below open-market value, in return for money and the right to remain under the plan’s occupancy terms. It is not a loan. The provider receives its agreed share when the home is sold.

Illustration only: selling a 70% share of a £180,000 home for £45,000 gives the provider 70% of the eventual sale proceeds under the agreement. If it sells for £180,000, that share is £126,000 before relevant costs. This is a sale, not a lifetime-mortgage loan.

What is the best type of equity release plan?

The best type of equity release plan will be determined by your personal circumstances and your preferences. They are best discussed in detail with a financial equity release adviser. Many people prefer a lifetime mortgage becomes the debt builds up gradually over time. And you can get a flexible lifetime mortgage that allows partial or full interest repayments.

By continually repaying some or all of the interest you manage to keep your debt down and the eventual cost to repay the loan is not as expensive. This means your estate beneficiaries will receive more of your wealth. 

What are the average lifetime mortgage interest rates?

Rates change and depend on the product and your circumstances. Obtain a current personalised illustration and compare the APRC, fees, repayment options and total projected cost; this article does not quote a live market-leading rate.

What are the benefits of equity release?

The most-talked about benefits of equity release are:

1. Large lump sum payment
2. Many lifetime mortgages allow interest to roll up without regular payments, but some require interest payments for a set period. Optional repayments, limits and any early-repayment charges depend on the contract.
3. Remain subject to the plan’s occupancy and other conditions.
4. Use proceeds for permitted purposes, with advice on risks and consequences.
5. A lifetime-mortgage advance is borrowed capital; home reversion, gifts and later income or gains have their own tax considerations.

What are the downfalls of equity release?

There are a couple of potential downfalls after choosing equity release, including:

1. Moving or downsizing depends on provider approval and may require partial repayment. Any charge exemption is product-specific and conditional.

2. Released capital can affect means-tested benefits. Drawdown does not guarantee continued entitlement; obtain advice on limits, disregards and deprivation rules.

Does equity release affect your state pension?

Equity release will not affect your state pension. You will continue to receive your full state pension if you release equity because payments are not based on your current wealth. 

Is it safe to do equity release? (Quick recap)

FCA authorisation and Council safeguards do not make equity release risk-free. Compare alternatives and obtain qualified advice on suitability.

Moreover, you should give Equity Release Council members preference for additional assurances. 

Alternatives to equity release

Even if you can see that equity release is not a con, you should still explore the many alternatives to equity release first. Your financial adviser should help you do this.

One of the most used alternatives to equity release is selling your home and buying a less expensive one, thus creating a pool of cash to fund your retirement. Be aware of the costs of moving.