What is equity release?
Equity release is essentially the use of the built-up equity in your property which helps to fund your retirement, home renovations, or anything that you wish to spend your money on.
There are a number of equity release products available that guarantee a lump sum of cash, future regular withdrawals, or a combination of both. The two principal forms of equity release products available are the lifetime mortgage and the home reversion plan.
The lifetime mortgage, as the name suggests, is long-term loan using your home as collateral. Interest is charged on what you have borrowed, you choose whether to make repayments, or not and the debt is repaid from the eventual sale of the property.
A home reversion plan involves the sale of part (or all) of your home, in exchange for a lump-sum or regular payments. These plans now only account for less than 1% of all equity release schemes written, due to the greater flexibility & loan sizes available with lifetime mortgages.
Equity release advantages
One of the biggest benefits of equity release is that you are able to stay in your house for the remainder of your life, or until you have to move to a care facility. It is a great way of freeing up cash without having to go through the stress of moving, or downsizing.
These plans are fully regulated by the Financial Conduct Authority which means you have a point of addressing any poor advice you may have received. In addition, the industry has a recognised trade body called the Equity Release Council, which lays down a code of conduct for all advisers, lenders & solicitors involved in transacting equity release.
Equity release risks and disadvantages
One potential negative is that it may reduce the value of any inheritance that you leave, and it could also reduce government benefits. Interest rates on lifetime mortgages tend to be higher than traditional mortgages, however they are usually fixed for the lifetime of the loan.
The longer you live at that property, the higher the amount you have to pay, assuming you make no repayments & the interest rolls-up. With a home reversion product, because the property essentially becomes co-owned, any increase in the value of the property will be split, according to the percentage owned or sold.
So is equity release safe?
Equity release is a fundamentally safe way of making the most of the equity in your home.
The question as to whether is ‘equity release safe’ has to be a ‘yes’ due to the aforementioned government involvement in the strict regulation of these products.
All advisers must have been previously vetted by the equity release companies to ensure they have passed the appropriate equity release qualifications needed to provide consumer advice. They cannot accept an application without these permissions.
However, to protect yourself from unexpected risk, the following exist:
- To check if advisers have passed the required exams then they are authorised in providing equity release advice, they will be shown on the Equity Release Council’s list of qualified advisers.
- The 'no negative equity guarantee' - this means that the combined cost of the loan and the interest can never exceed the value of your home.
- You must have a completely independent solicitor to that of the lender
- You are able to repay the loan at anytime, although it may be subject to early repayment charges
- Should you wish to move, you can port the equity release scheme to a new property, assuming it meets the lenders property criteria rules
Equity release has come a long way since its roots in the 1960’s and have evolved and become a mainstream mortgage in retirement for those over 55 and looking to improve their standard of living.