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Is Equity Release a Con? Quick Analysis

Equity Release Con

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

Is equity release a con? Many people have asked this question in the past and we’re not surprised that you’ve searched this question online today. 

After all, there are not many loans that provide a lump sum and demand zero monthly repayments. Along with a historic bad reputation, it’s natural to be cautious of the equity release industry. Read on to learn the key details of equity release and if equity release is safe. 

What is equity release and who qualifies?

Equity release schemes are tax-free loans that allow homeowners to borrow against their home equity – but they are much more unique than any other type of equity loan. These loans provide the loans and then do not ask for any monthly repayments. The debt is only repaid in a single complete payment when the debtor dies or moves out of their property and into long-term care.

When either of these things happen, the lender can force the sale of the property and use the money raised to recover what is owed. Any remaining sale money will be handed to the ex-property owner or the estate beneficiaries, depending on if the borrower has moved into care or passed away.

Equity release is only available to a small percentage of the population. First off you must be at least 55 years old to apply and in some instances, you may need to be younger than 85. The age requirements apply to all applicants when there are joint homeowners, such as a married couple. 

You must be releasing equity from your main residence that has a minimum value, often around £75,000. There should be no outstanding debts secured against your home, which includes a residential mortgage. Some equity release providers allow people to apply with a small mortgage, but they will require this to be paid off as part of the equity release loan. 

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What can equity release be spent on?

Equity release comes with no restrictions on what the money can be spent on. However, you may be forced to spend some of the money paying off a debt secured against your home if any exists, such as a small mortgage. 

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?

There should be no catch with equity release because homeowners should have taken the required steps to fully understand what they are agreeing to and how it will impact their future. 

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. 

Fortunately, the negative equity guarantee can stop your debt from growing too much – more on this later! 

Is equity release a con?

In the past, people have referred to equity release as a con because of how expensive these loans can be to repay. But legal equity release schemes are above board and cannot be considered a scam or a con. 

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?

Whether or not it is a good idea to do equity release will depend on personal circumstances and if there are any alternative methods of accessing money for your purpose. The need to use equity release schemes can be avoided if the individual takes steps to plan for their retirement earlier, such as taking out a private pension or buying an annuity. 

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. 

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

To ensure you do avoid any equity release scams, you should only consider lenders that are registered in England and Wales and authorised and regulated by the Financial Conduct Authority. This information should be visible on their website, but you should check it against the relevant financial services register. 

Give preference to Equity Release Council lenders

Another sure-fire way to avoid any equity release scams is to only use lenders that are members of the Equity Release Council. First, let’s explain what the Equity Release Council is. 

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!

This guarantee is only relevant to one of the two types of equity release loans, so it will be explained in the section below. 

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 provides a loan of up to 60% home equity in the best-case scenario. This loan is subject to a fixed interest rate. The amount incurred through interest rolls up and gets added to the total debt owed each month, meaning your debt grows bigger as time moves on. 

The total cost of a lifetime mortgage is best explained with an example. If you were to release £65,000 equity as a lump sum payment on a 6.4% interest rate, and then had to repay this debt because you need to move into long-term care after 12 years, you would owe close to £137,000 when your home is sold to clear the debt. 

The negative equity guarantee is a rule that states no lender can chase a debt that has exceeded the value of your home when it is sold. Using the example above, if the value of your property was £135,000 when the lifetime mortgage was taken out and declined in value to £120,000 by the time the property is sold, there would be an additional £17,000 left to pay. 

But in fact, it would not be owed because the negative equity guarantee states that the lender cannot chase debts not possible to repay through the sale proceeds. 

How a home reversion plan works

Home reversion plans are a much simpler way to release equity as a senior to lifetime mortgages. This is because they do not charge any interest on the loan – but it doesn’t necessarily mean they will be cheaper! 

A lifetime mortgage exchanges a percentage of your equity as a loan with no repayments needed for a fixed percentage of your property’s future sale money. For example, you may choose to take out 25% equity in a £180,000 home but have to give the lender 70% of the future sale value. In this example, you would get a £45,000 lump sum but have to repay approximately £126,000 when you die or move into care (depending on how the property value has changed).

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?

The average interest rates on a lifetime mortgage range from 2-10% depending on the lender, your property and your age. 

What are the benefits of equity release?

The most-talked about benefits of equity release are:

  1. Large lump sum payment
  2. No monthly repayments
  3. Continue living in your home
  4. Can be used for any purpose
  5. It’s tax-free cash! 

What are the downfalls of equity release?

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

  1. Downsizing your home without getting an equity release product that allows you to take your lifetime mortgage with you by paying some of it off. Most plans will allow this but will charge hefty early repayment fees on the part you need to pay off. So if this is your plan, make sure to get one with a downsizing clause included. 
  1. Not being aware of how receiving a large payment can affect your entitlement to means-tested benefits. You could lose access to Universal Credit or Pension Credit payments by significantly increasing your wealth. Get financial advice to discuss this in detail, and explore the potential of using drawdown equity release to avoid losing these payments. 

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)

Equity release schemes are safe when using legal lenders that are authorised and regulated by the Financial Conduct Authority. You should get advice first to explore alternative options that may be more beneficial in the long run. 

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. 

Find out more for FREE with MoneyNerd! 

Search MoneyNerd for more information on how you can use the value of your home to access a loan and make the rest of your life more enjoyable. We have plenty more blogs and guides all about releasing equity in the UK!