The best Equity Release Providers – Complete Analysis 2022
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What is the best equity release loan and the best equity release provider in the UK? These are two questions hastily asked by anyone considering equity release to fund their retirement or just improve the quality of later life.
Read this guide if you want to know more about equity release products and where you can get legitimate lifetime mortgages.
What is equity release?
Equity release is a method of borrowing using your property as security. It is only available to people over the age of 55 to release a tax-free lump sum that can be used to help fund their retirement. However, it can also be used for things like home improvements, investments and annual holidays.
Only consider using an equity release loan after receiving equity release financial advice. And only consider lenders that are authorised and regulated by the Financial Conduct Authority.
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How does equity release work?
Equity release works by allowing the homeowner to access some of their home equity as a lump sum payment or drawdown loan. This money is not paid back to the lender each month with interest like other loans, but rather, it is repaid in one payment when the homeowner dies or moves into long-term care.
You may be wondering how the debt is repaid in a single payment, especially if it is a large debt. The homeowner’s property is sold when they die or move into care, and it is the sale proceeds that are used to pay back the lender. Any remaining money is given back to the homeowner or added to their estate if they have passed away.
What is the catch with equity release?
Not having to repay a large debt until potentially after you pass away can sound like a great deal to some people, but there is somewhat of a catch. Equity release plans can easily cost double the amount to repay – if not more.
Because equity release is so expensive to repay, the amount you leave behind for loved ones can quickly diminish. If you have children relying on a significant inheritance from you when you die, equity release can be a difficult decision.
The two types of equity release are:
There are two types of equity release in the UK and one is much more used than the other. The most popular type of equity release is called a lifetime mortgage. And the lesser-used type of equity release is called a home reversion plan. We explain how a standard lifetime mortgage and home reversion plan work below.
Lifetime mortgages provide a lump sum or drawdown loan (i.e., a drawdown lifetime mortgage with an initial lump sum and cash reserve). This tax-free cash is charged with a fixed compounding interest rate based on the loan amount, your age, the value of your home and other details about your home.
The interest, like the principal loan amount, does not need to be repaid each month. The interest charged each month gets added to the total money owed, so it increases as time passes. Whatever the debt stands at when the last surviving homeowner dies or moves into care is how much will be taken from the sale proceeds of their property.
Lifetime mortgages are easy to understand with a simplified example. Let’s imagine Judith takes out a lifetime mortgage of £65,000 to help pay for her retirement. She has a lifetime mortgage for 12 years before moving into residential care. At this point, the loan which was charged with 6.4% interest, will have grown to approximately £137,000. So she will have to give up £137,000 from her property sale to the lender.
Home reversion plan
The other equity release plan is less complicated but not as widely used. Home reversion schemes provide the homeowner with a cash lump sum or drawdown loan and never charge any interest on the loan. The loan only has to be repaid after death or moving into care as per lifetime mortgage loans.
The home reversion lender will make a profit on the loan by locking in a fixed percentage of your future home’s sale money. For example, in exchange for a 25% equity loan today, you may be required to give up 75% of your home’s future sale value – around x3 your initial loan depending on how the value of your property changes.
What is the best type of equity release?
There is no best type of equity release because the type of equity release product you use should be based on personal situations and individual preferences, with advice from an equity release expert. Lifetime mortgages and home reversion plans could be the best option for different people.
However, lifetime mortgages are the more popular method, which is likely to do with the debt growing over time rather than instantly, as is the case with home reversion plans.
What is a good equity release rate?
The standard lifetime mortgage interest rates range between 2% and 8% at the time of writing. Any rate around 6% or under is considered a good rate. Securing a good lifetime mortgage rate is essential if you want to minimise how fast your debt will grow.
Most lenders offer free use of an equity release calculator to show you how the interest rate will cause the debt to grow.
What is the cheapest equity release interest rate?
The cheapest lifetime mortgage providers offer interest rates as low as 2% at the time of writing. To find the best rates you should search the whole of the equity release market, or engage an equity release broker who can help you find the leading equity release lenders that are regulated by the Financial Conduct Authority.
Where can you get an equity release plan?
Home reversion and lifetime mortgage providers are typically companies that specialise in equity release, but they may also be companies that deal with other financial products, loans and insurance, such as Aviva.
Not many banks offer lifetime mortgages and home reversion plans. Those that do usually stick to lifetime mortgages only, and they may be partnered with an equity release company, simply directing enquiries to this company instead.
What is the best equity release provider?
There is no single best equity release provider to choose. This is because they each offer terms and conditions beyond the interest rate which need to be carefully considered against individual needs.
For example, you may want to get a lifetime mortgage today but have aspirations of downsizing to the countryside in the not-so-distant future. In this situation, you would need an equity release provider that includes a downsizing clause, allowing you to move to a less valuable home and pay off some of your loan without triggering early repayment charges.
This is just one example of how individual needs should be considered and how there is no single best equity release provider for everyone.
Lastly, you may only want to consider a lender that is a member of the equity release council. This can have additional benefits.
The Equity Release Council
The Equity Release Council is a voluntary membership group that lenders and financial advisers can join. By doing so they become more appealing to senior homeowners because they must follow the group’s rules, and these rules are made to provide additional peace of mind and guarantees to the homeowner.
For example, the negative equity guarantee is one rule that states a lender cannot ask a homeowner to pay any debt that was not repaid through the sale of their property. There are a few reasons why the sale money could potentially not clear the whole debt, such as:
- They had the lifetime mortgage for a long time and the debt grew significantly
- The value of their home decreased
- Both of the above
Some of the best equity release companies
Below are some of the best equity release companies when seeking an equity release scheme in the UK. The information below was accurate at the time of publication but could change by the time you want to release equity. It is strongly advised that you do your own follow-up research and look for other lenders as well.
#1: One Family
One Family offer equity release with great customer service reviews. They allow all plan holders to downsize and incur no early repayment charges after just five years, and they offer equity release advice for a fixed fee of £950 inc VAT rather than charging a commission on the loan, which will benefit some borrowers wanting to take out a large loan.
Aviva is a household brand and not many people are aware that they also offer lifetime mortgages. This respected company has exceptional customer service ratings but they do have high early repayment charges up to 25%.
#3: More 2 Life
If you want flexibility from your equity release plan then More 2 Life can be a good option. Their equity release plans come with a downsizing clause so you never get charged for paying off some of your loan as part of a move. They also allow plan holders to add or remove names at a low cost and they charge 0% early repayment fees after 10 years.
One of the few banks that offer lifetime mortgages is Nationwide. These lifetime mortgages are available to people between the age of 55 and 84 up to £1 million. They do not charge repayment fees for downsizing as long as the move doesn’t take place for at least five years after taking out the loan. They also provide successful applicants with up to £1,000 cashback.
#5: Pure Retirement
Pure Retirement is an equity release company that only deals with these products, unlike companies like Aviva. They have some excellent online reviews regarding their customer service. And they only accept applications directly from independent financial advisers to make sure applicants have received adequate advice first.
Is there a better alternative to equity release?
One alternative to equity release that is used by many seniors is to downsize. This means selling their home and moving into a less-valuable and smaller home which is easier to manage in later life. This will create some money that can be used for retirement, home renovations or something else.
For other ways to access equity and get credit, check out our other free guides on MoneyNerd today!