Equity Release Council – Everything You Need to Know
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The Equity Release Council is a fantastic group working for older homeowners who are considering equity release and need advice during the process. We revisit the basics of equity release schemes before discussing what the Equity Release Council is – and what it does.
What is equity release?
Equity release is a way for senior homeowners – usually aged between 55 and 65 – to access some of their home equity as a loan that doesn’t need to be paid back until their home is sold after they die or when they move into long-term care.
How does equity release work?
Equity release in the UK works in one of two ways, either as a lifetime mortgage or a home reversion scheme.
A lifetime mortgage allows the homeowner to borrow against some of their home equity but never have to make any monthly repayments, including no interest repayments unless they choose to. A fixed interest rate is applied to the mortgage and simply rolls up each month to increase the total debt owed. This debt is only repaid when your home is sold, either as part of your estate after death or if you go into care.
A home reversion scheme is different. It generally does not charge any interest, but instead, the lender makes you a severely low offer for a percentage of your home’s future sale price. You might be offered 20% of your home’s value but will have to give up 60% of the money raised from its future sale.
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Is equity release a safe option?
Equity release is a safe option when you do your own research and access financial advice before making a decision. You should also ensure that any lender is authorised and regulated by the Financial Conduct Authority, and opt for lenders that are members of the Equity Release Council.
What is the Equity Release Council?
The Equity Release Council is a body that promotes high standards within the equity release industry. Its membership includes financial advisers and other financial service providers, equity release companies, solicitors, conveyancers and anyone else involved in equity release products and services.
Is Equity Release Council membership compulsory?
No, the Equity Release Council is voluntary to relevant financial services and companies. But by joining the council, they become recognised as following the best practice principles and guidelines set down to protect homeowners. And for this reason, homeowners generally only consider equity release schemes from companies that hold an active membership.
What Does the Equity Release Council do?
The Equity Release Council has an overarching aim to educate the general public on equity release options, while simultaneously ensuring members adhere to their guidelines and rules. By getting members to stick to these guidelines, they automatically increase the standard of services that homeowners considering equity release will receive.
The no negative equity guarantee explained
As part of the Equity Release Council’s rules and regulations, any equity release product offered to a UK homeowner should include a no negative equity guarantee. This is a guarantee that states a homeowner will never owe more than what their home sells for from their estate, or when it is sold after moving into long-term care.
For example, if you take out a lifetime mortgage and let the interest roll-up for over a decade, you could be in a situation where the total debt owed on the lifetime mortgage is more than what your home is worth (i.e. negative equity). The no negative equity guarantee states that the homeowner will never have to pay back more than what their home sells for.
This avoids any additional debts if they move into care, or it prevents having to pay more from the estate to clear the debt after death.
The benefits of equity release
The main benefits of equity release are:
- Access a lump sum or drawdown facility without having to make repayments
- The money you receive is a loan, and therefore is tax-free
- The money can be used for any purpose you wish
- You continue to live in your home without rent and without the threat of eviction
- As per the aforementioned no negative equity guarantee, you and your beneficiaries will never owe more than the value of your home once it is sold.
What is the downside to equity release?
The major downside to equity release is that the terms of the loan can be financially unattractive and significantly reduce the amount of inheritance you pass on.
For example, taking out a home reversion plan could unlock 20% of your home’s actual value in return for around 70% of the sale proceeds when it is eventually sold. If the home increases in value over time, the deal is even worse for you and the beneficiaries of your will.
Do I need a solicitor for equity release?
Yes, you will need to have your own solicitor to use an equity release scheme. It’s so important to have your own legal advice that the Equity Release Council has added it to their guidelines and rules. This means any legitimate lender governed by the Equity Release Council will expect you to have a solicitor as part of the process.
How much do solicitors charge for equity release?
Solicitors may charge a fixed fee and or a percentage of your loan amount for their financial services. The general rule is to expect to pay around 1.5% of your loan amount as a fee to an adviser. However, this is a general rule only and may not be the way your financial adviser or solicitor works.
What is the catch with equity release?
Some people consider the “catch” with equity release is that you get a bad deal. It’s true that home reversion schemes do provide loans with a much-reduced value compared to the percentage of your sale of the home they receive in the end. And lifetime mortgages can more than double over a decade, even with standard interest rates.
But the reason that the deals aren’t so appealing is that the lender needs to safeguard against losing money through the potential declining value of your property. It might look unfair, but this is because the lender must be cautious as well.
You can’t really be caught out by an equity release scheme if you choose a lender that is governed by the Equity Release Council and you do your research. Check out the Equity Release Council for more information on them – and head back to MoneyNerd soon to swat up on equity release.