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Equity Release Companies To Avoid? Reviewed 2022

Equity Release Companies To Avoid

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

What are the equity release companies to avoid? 

In this detailed new guide, we take a look at the different types of equity release and the advantages and disadvantages of equity release in the UK. We then look at which equity release companies to avoid, and which ones to consider. 

What is equity release and how does it work?

Equity release is an option for seniors who own their own home and want to access a lump sum or drawdown to help fund their retirement, or to pay for added luxuries such as holidays. 

An equity release product – there are two available in the UK – provides the senior with a percentage of their home equity as a loan that does not need to be repaid each month in the way that most loans are repaid. 

Instead of repaying each month, the senior only repays their debts when they move into long-term care or after death from their estate. In either situation, the debt is repaid from the money raised from the sale of their home, unless paid off in cash by estate beneficiaries. 

It might be possible to pay off equity release companies early, but this could trigger expensive early repayment charges. 

Getting involved in an equity release scheme is serious and should be carefully considered against alternative ways to raise cash in later life, such as downsizing. 

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What is the catch with equity release?

Equity release sounds like an awesome deal because there are no monthly repayments and there is a chance you won’t even be around when it needs to be paid back. But there is somewhat of a catch

The overall cost for equity release can be expensive. Not only does setting up an equity release plan cost thousands of pounds in financial advice and legal fees, but the cost to repay the loan is usually double or more than the loan amount taken out. This has a negative effect on how much wealth you leave behind for your loved ones. 

Lifetime mortgages vs home reversion plans

There are two ways that senior homeowners can use equity release. They can opt for a lifetime mortgage or use a home reversion plan. Both types of equity release work as described above, but they also have key differences. 

With a lifetime mortgage, the loan is charged with interest that rolls up each month. You might be allowed to voluntarily repay some or all of the interest to keep the debt down, but if you don’t, the debt grows each month. When it gets to the time of repayment, either after death or moving into long-term care, the total debt is recovered from the property sale proceeds. 

On the other hand, a home reversion plan does not apply any interest to the loan amount. These equity release providers simply request that they receive a fixed percentage of the future property sale. You should expect to give up at least double the percentage of equity you receive in return for your loan. For example, a 20% equity loan today could mean giving up 50% of the property’s future sale value. 

What is the best type of equity release?

Lifetime mortgages and home reversion plans offer seniors two ways of achieving equity release. A lifetime mortgage debt grows over time but the amount owed can escalate and become unpredictable. On the other hand, home reversion plans offer somewhat more of an assurance of what your loan will cost in the end, but the total debt increase is instant. 

There is no best type of equity release, but it is well-known that more seniors in the UK use a lifetime mortgage over a home reversion plan. 

Who is equity release available to?

Equity release is only available to senior homeowners above the age of 55. If you want to apply for an equity release product as joint homeowners then both applicants need to suffice the age criteria. A handful of lenders will apply maximum age limits to their equity release products. For example, if you want a lifetime mortgage from Nationwide, you must be between 55 and 84 to be considered. 

It is only possible to release equity from your main residence rather than second properties. In most cases, the home must not have any debt still attached, including a residential mortgage or secured loans. 

The advantages of equity release

The benefits of using an equity release plan are:

  1. You can receive a lump sum or drawdown loan
  2. The money is not taxed and can be spent on anything you wish
  3. It is an effective method of large borrowing for seniors
  4. You do not have to repay the loan or the interest each month
  5. You continue to live in the property and pay no (new) mortgage or rent
  6. It can be an optimum method of making later life more enjoyable and comfortable

What are the downsides of equity release?

Along with the overall cost of equity release and how this expense harms the value of your estate you pass on, there are some other downsides to equity release. The main ones are:

  1. It is exceptionally expensive to get out of an equity release scheme. Most equity release companies charge high early repayment charges so it can be unaffordable for many to exit their plan. However, there are some equity release providers which wipe all of their early repayments costs after ten years. 
  2. The loan you receive could significantly improve your wealth, but this new wealth could mean you become ineligible for some means-tested state benefits, such as Universal Credit or Pension Credits. 
  3. You may need permission from the equity release company if you want to make significant changes to the property, such as restructuring the layout. 

Are equity release schemes safe?

Equity release products are safe when accessed from a lender that is authorised and regulated by the Financial Conduct Authority. This is a sign that the lender is a legitimate financial company in the UK. However, for additional protection, you should also be searching for lenders that are members of the Equity Release Council. 

What is the Equity Release Council?

The Equity Release Council is a body that encourages every lender offering lifetime mortgages and home reversion schemes to join their group and follow their rules. It is not compulsory for a lender to become a member of the Equity Release Council, but doing so can be a good idea. 

When lenders become a member, they follow multiple rules and guidelines designed to offer homeowners greater reassurances and protection. In doing so, they become more appealing equity release companies than those that are not members. 

For example, all members must commit to upholding the negative equity guarantee. If you have a lifetime mortgage for a long time and do not go into residential care, the interest can build up so much that the total debt may be greater than the value of your property. So when the property does need to be sold to clear the debt, the money raised is not enough to pay off the equity release company.

But the negative equity guarantee states that equity release lenders cannot chase debts that exceed the sale value of the property. If your property does not repay all the money owed, then you, your estate and any beneficiaries of your estate will not have to find additional money to clear the lifetime mortgage. 

It is beneficial rules like the negative equity guarantee which is why so many senior homeowners avoid equity release companies that are not members of the Equity Release Council. 

Do I need financial advice before using equity release?

Before applying to equity release providers you must receive financial advice and legal advice, which is also a rule imposed on lenders by the Equity Release Council. Financial advice is there to ensure you understand the equity release plan and how it works, as well as assess you for options to avoid equity release. Legal advice is required to ensure you have not been mis-sold an equity release plan from a rogue financial adviser, as well as to represent you throughout the process of applying. 

Interestingly, the council also states you can only get equity release legal advice from a law firm with at least four lawyers working at the company. This could rule out smaller local firms from helping you with equity release.  

Where can you get an equity release plan?

Equity release products are available from a wide range of companies that operate in the financial or even insurance industries. For example, companies like Aviva offer an equity release loan. Some companies work exclusively to offer equity release products only. 

Do any banks do equity release?

Yes, a number of UK banks also offer their own equity release product, which you may need to book an appointment to discuss. Few banks openly advertise the types of equity release on offer via their website. At the time of publication, Nationwide Bank provides plenty of detail about its lifetime mortgage product online. 

What are the pitfalls in equity release?

The biggest pitfall of equity release is not taking the time to research these schemes and fully understand what they’re all about. Another pitfall is borrowing more than you need for no reason. If you only need x amount of money for a specific project, it is not beneficial to borrow more just because you can. This is why Martin Lewis has been on TV stating to only borrow “as little as possible with equity release. 

Equity release companies to avoid

Not everyone should pick the same equity release company because the company and its product needs to suit your personal circumstances. The same logic should be applied when trying to find out which equity release companies to avoid. One company could offer the best deal for someone, but should be avoided by another person. 

Nevertheless, here are some tips on how to identify the companies to avoid for you:

  1. Everyone should avoid companies that are not authorised and regulated by the Financial Conduct Authority. 
  2. It is highly recommended to avoid companies that are not members of the Equity Release Council, unless recommended otherwise by your independent financial adviser.
  3. Avoid companies with no downsizing clause if you have plans to move to a less valuable home in the future. Without a downsizing clause, you may be required to pay excessive early repayment costs.
  4. Avoid companies that do not allow you to make voluntary interest payments if you plan on trying to mitigate the debt and maximise the estate you pass on to loved ones. 

Some of the best equity release companies

Now that we have explained some things that will help you identify equity release companies to avoid, it’s time to give you some companies to consider. Here are some of the best equity release companies at the time of writing, but you should always do your own updated research and speak with a financial adviser for personalised advice. 

  1. More 2 Life – this company offers some of the best flexibility and will not charge the earth if you want to pay off some of the plan to downsize.
  2. LV – this company is great when it comes to early repayment charges. In fact, after ten years there are no early repayment fees at all!
  3. Pure Retirement – a highly respected company that has won awards for its customer service. A good sign is that they will only accept applications directly from independent financial advisers. 
  4. Nationwide – this high-street bank offers free in-house advice and up to £1,000 cashback, which could be used to pay for an equity release solicitor. 
  5. One Family – low costs and fixed advice at £950 inc VAT, they can be a cost-effective option for people taking out larger loans. 

Is equity release money taxed?

Equity release is a type of loan and should never be subject to tax. 

This question gets asked a lot because equity release doesn’t feel like a loan because you don’t make regular repayments. But it is a form of credit – and credit isn’t taxed. 

Does equity release affect your state pension?

Receiving a large amount of money from an equity release scheme will not affect your right to receive a state pension, nor will it affect the amount of state pension you receive. This is because a basic state pension is not a means-tested benefit. 

It is only means-tested benefits that can be affected by your new wealth. If you normally receive top-up payments to your state pension, known as Pension Credits, then these could be affected by having more than £10,500 in savings. You may want to discuss this with your financial adviser. 

Should I use equity release?

The best way of understanding if equity release is the best option in your circumstances is to keep reading about these products and speak with an equity release adviser. Martin Lewis suggests that it is best used as late as possible and by releasing as little as possible. 

Just remember to only use equity release companies that are fully regulated by the Financial Conduct Authority. 

Learn more about equity release companies for FREE!

If you want more equity release guidance so you can identify the equity release companies to avoid and the ones to consider, take a butchers at our other MoneyNerd guides. We have lots more to tell you about equity release in the UK – and it is all for free!