Is equity release safe?Mark Gregory checked this page for accuracy on 18th November 2019.
Equity release products are safe as they’re regulated by the Financial Conduct Authority (FCA) and governed by the Equity Release Council (ERC). With lifetime mortgages, you always own your home and any increase in its value is yours. Plus, all equity release plans come with a no negative equity guarantee. The downsides are that the inheritance you leave will be reduced and if you claim means-tested benefits, these could be affected.
Is equity release a safe way to borrow?
For many homeowners over the age of 55, equity release could be a good option to borrow money to supplement their incomes, repay debts, enjoy some of life’s luxuries or financially help loved ones. Why not download our free ‘Is equity release safe?’ factsheet to learn more about the protections that are in place that make equity release a safe way to borrow.
We also appreciate that taking out equity release is a big financial decision and that’s why our patient and experienced advisers provide quality advice from the whole of the market, with no pressure. We’ll explain all the benefits, as well as the potential downsides and any pitfalls. If we don’t think equity release is right and a good option for you, we will say so. It’s that simple. You can be certain that you won’t be forced into making any decisions that aren’t right for you or your family.
Are there any pitfalls or downsides to equity release?
Equity release could present a few financial risks that you should be aware of. While there are no potential dangers or pitfalls as such, the you should understand that equity release will reduce the inheritance you leave for your family. Just like any mortgage or other form of borrowing, both the amount you initially borrow plus the accruing interest must be repaid at some point in the future.
Equity release is different from other forms of borrowing because you don’t have to make any monthly repayments unless you want to. As the interest is compounded, then the total amount to be repaid could increase significantly over time.
For example, if you borrow £100,000 at an interest rate of 4%, after 18 years, the total amount to be repaid will have doubled to £200,000. There are though many ways that you can manage the balance, through the plan and the features you choose. It’s also worth mentioning that the value of houses typically increases over time and in this example, your home will probably be worth a lot more in 18 years than it is now – which could offset the final amount to be repaid. Why not use our free calculator to understand the potential value of your estate when your plan is repaid?
Secondly, if you are considering equity release, it’s also a good idea to speak to your Equity Release Supermarket adviser about any means-tested benefits you may be claiming as you could potentially lose them.
That’s because, if you are claiming a number of benefits, borrowing a significant amount of money as a lump sum could take you above the eligibility limits. The good news is that there are ways to mitigate this.
And lastly, some equity release plans do come with large early repayment charges and so if you think that you may want to repay your plan at some point in the future, then talk to your Equity Release Supermarket adviser about this.
Does equity release offer any other safeguards and protections?
Equity Release is regulated
Many years ago, the equity release schemes that were available were not regulated.
The dangers of these schemes were that they didn’t offer the legal protections of modern-day plans. The industry is now regulated by the Financial Conduct Authority (FCA), the financial services watchdog and regulator in the UK. This means that all lenders, brokers and advisers must have the permission (authorisation) of the FCA to lend and/or give financial advice. They must also follow the FCA’s strict codes of conduct. In addition, being regulated by the FCA means that consumers have adequate and appropriate protections in place.
Equity release follows a strict Code of Conduct
Since 1991, the industry has also been overseen by its governing body – the Equity Release Council (ERC). Equity Release Supermarket is a long-standing member. The ERC has a strict Code of Conduct which is designed to protect consumers and keep you financially safe. These include:
- You must receive financial and legal advice.
- That all products must have a ‘no negative equity guarantee’ – which means that your loved ones will never repay more than the value of your home.
- That you can stay in your home for life.
- That all those taking out equity release have at least one face-to-face meeting with an independent solicitor.
Equity release is an advised financial product, which simply means that you cannot take out a plan without having taken appropriate financial advice from a suitably qualified professional.
Advisers must have taken special qualifications to become equity release advisers. If you are unsure if your adviser is one of them, it’s a good idea to check the Equity Release Council’s member’s directory to make sure they are.
Rest assured that all the Equity Release Supermarket’s advisers are listed as qualified members of the Equity Release Council.
Your solicitor takes care of the legalities
As mentioned above, you must have at least one face to face meeting with an independent solicitor during the equity release process. While they cannot give you financial advice, your solicitor will ensure that all your paperwork is in order and any legal pitfalls are avoided.
The flexibility of equity release
Equity release offers safeguards that traditional mortgages don’t and it’s a good idea to understand what these are while you are thinking about taking out an equity release plan.
For example, most plans don’t require any repayments and, as such, you cannot get into arrears, default or have your home repossessed for non-payment.
The new breed of plans also come with a wide range of features and options, which you can tailor to create a plan that is right for you, both now and in the future. It’s always a good idea to talk through these with your equity release adviser but these include -
- Plans with fixed interest rates for life, meaning you'll always know how much you must repay in the future.
- Fixed early repayment charges, knowing exactly what the penalty may be, if you wish to repay your plan early.
- Plans allowing you to make ad-hoc voluntary payments which could help to manage the future balance.
- Compassionate early repayment charges, allowing penalty-free repayment of a plan within three years of a partner dying or moving into long-term care.
- Downsizing protection which means that you can repay your equity release plan penalty free and move home once your plan been in place for at least 5 years.