Is Equity Release Safe? What You Need to Know
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Is equity release safe? This is probably the first question you ask when you start to consider releasing equity as a senior.
In this guide, we discuss the safety of accessing tax-free cash from the value of your property and your ability to stay in your home without issues. Read on to determine if equity release could work for you and if it is a good idea overall.
Equity release in a nutshell
Equity release is a method used by seniors to access cash in your property without having to make any monthly principal or interest repayments. Instead, the lump sum or drawdown is repaid when your property is sold.
You’ll never be forced to sell your property unless you need to go into long-term care and would therefore be no longer using it. If you never enter into a care facility, the debt is repaid from the sale of your home after death.
There are two ways to make equity release work, either through a lifetime mortgage or the less common home reversion scheme.
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Equity release eligibility
Taking out equity release requires the homeowner or homeowners to meet eligibility criteria, which is set by individual lenders. The general rules are that the homeowner must meet an age requirement, usually between 55 and 65. The property you want to release equity from must be your main residence with a value of at least £75,000 and no existing mortgage.
What if one homeowner is under 55?
If a particular plan has an age requirement that the homeowner must be at least 55, and a couple wants to take it out but one of the pair is under 55, they will not be allowed. The age requirement is applied to the youngest homeowner. So, if one is 54 and the other is 56, they will not be eligible until the youngest turns 55.
Ways you can release equity
The three ways of releasing equity in the UK are:
#1: Lifetime mortgages
A lifetime mortgage provides you with a percentage of your equity and is charged with a fixed interest rate. The interest is never owed through monthly payments and simply adds to the total of your debt. You can usually make voluntary payments. But the longer you live, or the longer before you go into care, the bigger your debt will become. You’re protected by an equity guarantee, which means you’ll never owe more than the property value (more on this later).
#2: Enhanced lifetime mortgages
Enhanced equity release could allow you to access more of your equity due to poor health. If you can show you have a lower life expectancy through a lifestyle and health questionnaire and medical records, the lender will allow you to borrow more.
#3: Home reversion scheme
Home reversion works by not charging interest but by giving you a loan for a percentage of your home’s future sale value. However, the percentage is always much bigger than what the loan is worth. For example, you might get 10% of your equity as cash in return for 40% of the home’s future sale value.
Are equity release schemes safe?
Equity release schemes are safe if you choose an equity release provider that is legitimate, meaning it is authorised and regulated by the Financial Conduct Authority (FCA).
But you should also only look for companies that are active members of the Equity Release Council. Although not every provider must be a member of this group, if they are a member it shows they will stick to rules and guidelines that are in your best interest.
How safe is equity release?
Equity release is safe to an exceptional degree as long as you use service providers and a company that ticks the boxes above, your home will not be at risk while living in it.
What is the Equity Release Council?
The Equity Release Council (ERC) is a body that promotes high standards of lending and equity release advice within the sector. It offers the chance for equity release companies, financial advisers and solicitors working in the industry to subscribe to a membership and simultaneously subscribe to strict rules and guidelines on how they work.
These rules and guidelines have been composed to make equity release safe for homeowners and work in your favour. By only considering equity release products from members and sourcing a financial adviser who is also a member, you can be assured that you will avoid the pitfalls of equity release.
For example, the ERC states that lenders must allow you to move to another property after taking out a plan, as long as the new property is deemed suitable for resale later.
The negative equity guarantee
When you take out a lifetime mortgage and allow the interest to roll up – i.e. you don’t make any voluntary interest payments – the total debt can grow significantly. To give you an idea of how much your debt can grow, let’s look at an example.
If you take out a lifetime mortgage of £65,000 and accept an interest rate of 6.4%, after just 12 years your total debt will be more than double your loan amount (yes – £130,000+). This can be quite scary because the longer you live without needing to go into care, the more your debt is growing.
One of the risks in this situation is that your total debt becomes more valuable than what your home is worth. So, when it is eventually sold, there will be a shortfall between the sale proceeds and the debt owed.
But when you choose an equity release scheme from a provider that is a member of the Equity Release Council, the provider has agreed to one of the rules that prevent any shortfall from being payable, namely the negative equity guarantee.
The negative equity guarantee is one of the rules that makes equity release safe. It states that the homeowner will never owe more on the total debt than what their property sells for.
For example, if you move into care and sell your home for £200,000 but your total debt has grown to £214.564, you will not have to pay the additional £14,564. Similarly, if you die and your property sells for £200,000, the outstanding £14,564 will not need to be paid from the rest of your estate or by your estate beneficiaries.
What are the advantages of releasing equity?
The reasons to consider equity release are:
- It’s safe when done properly with legitimate companies and Equity Release Council members.
- You have the option to pay interest and reduce your debt (lifetime mortgage)
- You can add inheritance protection to ensure a percentage of your property goes to beneficiaries
- You are guaranteed to have protection against negative equity and repossession with Equity Release Council members
- You can still move home to an appropriate property that the lender will just as easily sell
- The money can be provided as a lump sum or drawdown in most cases
- You do not have to pay any income tax or CGT on the money because it is classed as a loan
- You can spend the money on anything you prefer, or simply keep it as a retirement pot
- Doing so might reduce inheritance tax on your estate
What is the downside to equity release?
The overriding downside to equity release is that you have to pay a lot in the long run to access money now. A lifetime mortgage can easily double your debt over a decade, and home reversion plans are usually viewed as a rip off. This makes them worthless to some but still worthwhile to others, especially if you don’t have anyone to inherit your estate.
Other downsides include:
- High early repayment fees
- Can remove eligibility for some means-tested benefits
- Hard to change your mind
- Can be more difficult to downsize in the future (not impossible!)
Can you lose your house with equity release?
When people ask “is equity release safe?”, they are usually asking if they can lose their home by agreeing to an equity release plan.
When you have an equity release plan from a member of the Equity Release Council, the simple answer is no, you cannot lose your home and you will continue using it as normal without being forced out or suddenly asked to make payments.
Members must commit to a guarantee that the home will always be the homeowners, but there are some very rare exceptions to this rule. Your home could still be repossessed if:
- You provided fraudulent documents on your equity release application
- You have not been living in the home for more than six months (possibly because you moved into a second home you have).
- You purposefully neglect the property or are failing to maintain it. This may include not having building insurance.
What is the catch with equity release?
Some commentators suggest that the catch of equity release is that the long-term cost of any form of equity release is significant. It’s true that your total debt can double with a lifetime mortgage and you have to give up a substantial value of your home with a home reversion plan, which does have a knock-on effect on your estate and the inheritance you pass on.
But this is more of a drawback than a catch. Lenders must protect themselves in case the value of your property decreases over time, as well as make some degree of profit on the agreement.
The real catch would be not doing enough research on equity release to make an informed decision. To truly understand whether equity release is right for you, you need to get financial advice and possibly legal advice. Although these financial services can cost, they are mandatory as part of some ERC rules.
Is equity release worth considering?
Equity release is worth considering if you want to access tax-free cash lump sum or retirement income without having to make repayments. However, there may be reasons why you will not want to consider it, such as wanting to pass on your home to family or maximise the inheritance they receive. This is why people with no children or financially secure children are more likely to consider equity release.
Just remember to only consider associated financial services and lenders that are authorised and regulated by the Financial Conduct Authority, and are members of the Equity Release Council.
Can you release equity with poor credit?
You can still use equity release plans if you have poor credit. The company providing the loan will not look at your personal finances or credit score when assessing your application. Instead, they assess your property to determine how easy it will be to sell on the open market in the future. For example, detached and well-maintained properties in urban areas are easy to sell, whereas unique boathouses or remote farms are more difficult.
Is equity release a safe option? (Quick recap)
So, is equity release safe? The answer is yes if you choose an equity release adviser who is authorised and regulated by the Financial Conduct Authority and independent of the equity release plans you are considering.
Although it’s essential to use a lender that is also governed by the FCA, equity release is significantly safer if they are a member of the Equity Release Council. This is due to the additional guarantees that you’ll always keep your home and the aforementioned negative equity guarantee.
Take your time and don’t rush the process to be extra safe.
Discover more FREE equity release guides!
You’re right to question the safety of using equity release schemes in the UK. But this is just one of the many questions you should be querying. For more information on equity release and related topics, such as tax, means-tested benefits, downsizing plans and more, read the other equity release guides on MoneyNerd.
All of these guides are 100% free to read and are written with clear explanations and examples. We make understanding equity release simple.