Best Equity Release Deals – Complete Analysis
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What is the best equity release method in the UK and what is the best equity release provider? Anyone considering a lifetime mortgage or other plan will be eager to know the answers to these questions.
Although everyone should be receiving equity release advice to avoid the common equity release pitfalls, explore alternatives and potentially help to choose a provider, there is nothing wrong with some equity release window shopping.
Our team has done some digging to find some of the best equity release options in the UK. Take a look at what we found in this guide, but remember to do your own timely research as well.
What is equity release?
Equity release is a type of borrowing exclusively available to senior homeowners. It provides a lump sum or drawdown loan that does not require any monthly repayments. The loan is instead paid back from some or all of the money raised from the sale of the property, either after death or after moving out of the property and into long-term care.
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What can equity release be used for?
Equity release is used as a way to boost your finances as you get near to retirement or in retirement. The loan may act as a pool of money to be used on everyday expenses, simultaneously improving the quality of later life. It could be earmarked for specific expenses, such as annual or bi-0annula holidays abroad or home improvements. Some seniors use the money to enhance their home in a way to prepare for later life and reduced mobility, such as installing a chair lift.
The money can be spent in any way the homeowner desires, and it can even be given away to their nearest and dearest. However, this financial gift could still be subject to inheritance tax if you die within seven years of gifting the money.
How to qualify for equity release
To qualify for an equity release plan in the UK, you will need to meet a minimum age requirement of 55 years old. This applies to both homeowners on joint applications. There might be an upper age limit. For example, Nationwide currently only offers their equity release plan to people up to the age of 84.
The age requirement is just the first hurdle to being able to apply. You’ll also need to own your home without an outstanding mortgage and that property should be valued above £70,000 at least. If you satisfy the primary eligibility criteria, the lender will then value the property and carry out checks before offering you an equity release plan.
Are equity release plans any good?
Equity release can be an advantageous option for some people to retire with additional financial security and comfort. It is mandatory that you engage with a financial adviser to assess all of your options before making a decision.
An equity release lender may offer their own financial adviser, who should not pressure you into their company’s equity release plans. Alternatively, you can choose to use an independent financial adviser not connected to an equity release lender.
What is the catch with equity release?
It is common for an equity release lender to make significant profits from these loans. The overall cost of using equity release can be substantial. No matter what type of equity release product you choose, it isn’t uncommon to have to pay more than double back the amount borrowed.
If you are giving away a significant value of your property in the future, your children may be missing out on a chunk of their prospective inheritance.
The two types of equity release
Equity release in the UK is completed through one of two different products, namely home reversion plans and lifetime mortgages. Both of these plans do not ask for monthly payments and they are only paid back after you die or move into care. But they still work in different ways, as we explain here:
Lifetime mortgage explained
A lifetime mortgage equity release lender will apply fixed interest to the amount of money loaned. The interest can be voluntarily repaid, but if not, it simply gets added to the total debt, which is known as rolling interest.
So over time your debt grows but only gets repaid from the future sale proceeds of your property. Even with a low-interest rate, your debt can double in around 15 years. Getting out of a lifetime mortgage is notoriously expensive due to the early repayment charge.
There are variations of lifetime mortgages, such as an enhanced lifetime mortgage used by people with poor health to access more equity than is usually possible.
Home reversion plan explained
Home reversion plans offer more certainty about what you will end up paying back, but they are expensive from the outset. They do not add interest to your loan. The equity release company asks for a percentage of the property sale monies in the future in exchange for the loan today. However, the percentage of equity you release as a loan is usually less than half the percentage that you have to pay back.
For example, releasing 30% on a £170,000 property will give you £51,000. But you might have to agree to give the equity release company 60% in the future, equal to £102,000 and rising depending on if the value of your home increases.
Lump sum vs drawdown equity release
Lifetime mortgages and reversion plans can be accessed as a lump sum or drawdown loan. As the name suggests, a lump sum will provide the loan in a single large payment sent to your bank account. Whereas drawdown lifetime mortgages or drawdown home reversion schemes provide the homeowner(s) with a drawdown facility where they can withdraw smaller amounts in stages.
Unless you plan on spending all of the money quickly, a drawdown equity release plan can be beneficial over a cash lump sum. Drawdown lifetime mortgages mitigate the interest applied to the loan, and they may prevent you from becoming ineligible for some means-tested benefits from the UK Government.
What is the best type of equity release?
Only a financial adviser assessing your suitability for equity release will be able to say for sure which type of equity release is best for you. Lifetime mortgages are more commonly used compared to reversion schemes, which could be because a lifetime mortgage debt grows gradually compared to a reversion scheme which (almost) fixes the debt repayment amount from the start.
Using a lifetime mortgage could be the more popular choice simply because they are more widely advertised among companies and banks.
What is a typical interest rate for equity release?
Interest is only added to equity release loans received through a lifetime mortgage plan. The very best lifetime mortgage interest rates can be found below 5%. Some people, loans and properties may not qualify for these lower rates and may have to settle for a lifetime mortgage with an interest rate between 5% and 9%.
What this interest rate means in practice and over the long-term should be explained in full when you receive financial advice. You may want to use an equity release calculator for clarity.
How is the equity release interest rate calculated?
When a loan is usually taken out, the interest rate is often decided by multiple factors such as the applicant’s income, existing debt, size of the loan, repayment period and more. But with a lifetime mortgage, most of these factors are not influential on the interest rate offered because the applicant does not need to make monthly repayments.
Lifetime mortgage interest rates are decided based on the person’s age, loan amount, property value and possibly other details concerning the property. The older you are when you take out a lifetime mortgage, the lower the interest rate you can usually get. This is one of the main reasons why Martin Lewis states that a lifetime mortgage should be chosen as late as you can leave it.
What equity release providers should I avoid?
You should avoid any illegitimate equity release provider, which means any company that is not authorised and regulated by the Financial Conduct Authority. You can guarantee that your lender is authorised and regulated by the Financial Conduct Authority if you choose a member of the Equity Release Council because these members must be legally operating to join.
But this isn’t the only reason why you should look for a member of the Equity Release Council. This group sets down rules and guidelines for all members to follow, which work in the interest of the senior homeowners. We discuss the council in further detail and the benefits of choosing its members shortly.
Moreover, you should avoid equity release schemes that do not work for your situation. For example, if you plan on downsizing later in life, you should choose a member that offers downsizing protection, meaning you will not be financially penalised for paying off some of your lifetime mortgage earlier to move to a less-valuable home. Your adviser should discuss these sorts of things with you before applying.
What is the Equity Release Council?
The Equity Release Council offers lenders and advisers the opportunity to join their group and display that they are members. They must follow the group’s rules on how equity release is provided and works. This benefits the companies because many homeowners only trust members for independent advice and plans.
Benefits of using a council member
Some of the top benefits of using an Equity Release Council member are:
- The negative equity guarantee – some people may be worried that if they have a lifetime mortgage for an extended period of time, the amount they owe as a debt will be astronomical and not be repayable with the sale of their property alone. They may worry that their other money or even their beneficiaries will have to cover what the house sale does not. But this is not a concern with the negative equity guarantee, which states that a lender cannot recover any debt beyond the money raised through the eventual property sale.
- You can move home without issues – members must allow homeowners to move to a property of equal or higher value of your home right now – and take your lifetime mortgage with you. The property must be deemed suitable, which is usually the case if it has been properly built and not an unusual or especially remote home. You could move to a lesser valuable property as well, but would need to repay some of your lifetime mortgage to do so.
- You are guaranteed not to be evicted early – members must promise not to attempt to evict you and try to recover the debt earlier than agreed. This is a common worry among those contemplating a lifetime mortgage, but it shouldn’t be as long as you do not lie on your application.
What are the best equity release schemes today?
Although not exclusively the best equity release plans on the market right now, we have done some research and found five equity release providers that may be of interest to you.
Each of these lenders provides unique deals that could make their plans highly suitable for your specific situation. Always do your own timely research as details could change.
- Legal & General
Legal & General offer equity release plans worth up to £2 million, making them a specialist equity release provider for those with significantly valuable properties. They may also be worth considering if you do not need a large loan, due to some good customer service reviews.
- More 2 Life
More 2 Life offers some of the most flexible equity release products on the market. Their early repayment charges are lower than standard and are completely removed after ten years. You also benefit from downsizing protection and low costs to remove or add a new name to your equity release plan.
- Nationwide Banks
Nationwide fully advertise and disclose their lifetime mortgage product via their website, which is not always the case among banks. You can take out their lifetime mortgage between the age of 55 and 84, and benefit from low costs and fees throughout. They currently offer £1,000 cashback on the mortgage too.
- Pure Retirement
Pure Retirement has won a string of awards for its equity release product. They deal exclusively in equity release whereas other companies may also work in insurance and other financial products. They have some stellar online reviews and only accept applications from independent financial advisers working on your behalf, which is the hallmark of a respectable equity release company.
- One Family
One significant cost when taking out equity release is the financial advice you must receive first. The bulk of advisers charge a fee that is a percentage of your loan, which could be as high as 4%. This means taking out a £100,000 lifetime mortgage could cost you £4,000 in advice. Those in this situation taking out larger loans may want to consider One Family because they provide their own advice for a fixed fee of £950 no matter how big your loan is.
They’re also known for having good customer service and zero downsizing fees after just five years.
Will equity release stop my pension payments?
Equity release can stop you from being entitled to receive means-tested benefits.
Because means-tested benefits take into consideration how much wealth you have before deciding if you are eligible or how much you are eligible to receive, suddenly receiving a lump sum of money via equity release could stop or reduce payments.
Luckily, the state pension is not a means-tested benefit and taking out an equity release plan will not stop or reduce your state pension. However, pension credit payments are means-tested and can be affected, along with Universal Credit. You may want to discuss this with your financial adviser.
Do you pay tax on equity release loans?
Whether you receive a cash lump sum or a drawdown, all the money received when you release equity with an equity release plan is tax-free. In fact, any money you receive from personal credit in the UK is tax-free cash. Remember that just because you do not make monthly payments does not mean equity release is not a loan.
Is there a better alternative to equity release?
Equity release advisers should be discussing alternative options before telling you the amount you can borrow or searching for the best equity release companies on your behalf. One of the alternatives usually proposed is to downsize to a property of less value than your current one, which may be beneficial when you get older in any case.
If you sell your current property and buy another one that is cheaper, you could create a significant amount of cash to contribute to funding your retirement. Just be aware that there will be additional costs when moving and it can be stressful.
Is a lifetime mortgage right for you?
We might not be able to state for certain which is the best equity release provider or best equity release plan to choose, but hopefully, the information above has helped you understand what to do next. And maybe you want to look into some of the equity release providers we dug out within our own research.
To be sure if a lifetime mortgage is right for you, read more about them on MoneyNerd and get in touch with a specialist adviser for a personalised assessment.