Equity release is when you unlock some of the wealth tied up in your home in order to raise a cash lump sum.
There are two types of equity release products in the market with some fundamental differences in how they work. Home reversion is when you sell a part of your home to an equity release provider. Lifetime mortgages are much more widely used and involve taking out a loan that is secured against your home, but you remain the sole owner of your property.
According to the Equity Release Council, lifetime mortgages made up the vast majority of all equity release plans taken out in 2020.
All equity release products are high risk and won’t be suitable for everyone. Current rules from the financial services regulator the Financial Conduct Authority (FCA) require you to speak to a qualified financial advisor before you are able to take out an equity release product to ensure that it is suitable for your circumstances and that you understand the long term implications of doing so.
For some, equity release can be useful in a number of circumstances – for example where they are looking to:
- Clear an existing mortgage
- Fund home improvements
- Supplement your retirement income
- Gift money to loved ones
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
What are the risks of equity release?
Taking money out of your property through equity release can have a number of significant implications for tax, benefits, inheritance and your long-term financial planning.
Some key points to consider for equity release in general are:
Inheritance planning
If you take out a lifetime mortgage or sell a share of your property through a home reversion scheme then you will reduce the amount of inheritance you will be able to leave your loved ones, potentially significantly. Make sure you understand what the total cost of borrowing could be under various different scenarios with our Lifetime mortgage calculator.
Your age
The longer an equity release plan is in place, the higher the total cost of borrowing can be. This is because of the compounding effect of the interest you owe starting to be charged on top of existing interest. You can avoid this happening by choosing to pay back the interest monthly on the money you owe. If you don’t do this, the longer your equity release plan is in place, the higher the total cost of borrowing. While no-one can predict the future, the younger you are when you take out an equity release product, the more likely it is that the plan will be in place for a longer period of time.
Benefit entitlements
Taking a cash lump sum through equity release could affect your entitlement to means tested benefits such as Pension Credit, Universal Credit or Housing Benefit. Any money released wll be classed as ‘capital’ in eligibility assessments for means tested benefits which can impact your entitlement to claim them. Read more about how lump sum payments and savings can affect means-tested benefits.
Ongoing terms and conditions
Your equity release provider will place restrictions and conditions on you continuing to live in your own home. This could be as simple as requiring you to maintain suitable buildings insurance to protect the property, or they could impose restrictions on the type and nature of home improvements you can make. Most will expect you to look after the property and maintain it in a reasonable condition. Always ensure you understand what conditions your lender is asking you to comply with.
Ability to move home
Can you move your equity release plan to a different home if you want or need to? What fees and charges will be payable if you do? What restrictions are there on the type of property you can move to? While many plans are portable, they don’t allow you to move to any property you wish as it will still need to meet your lender’s requirements of a suitable property.
Ability to change your mind
Equity release products can be difficult to unwind or cancel if you change your mind. At best, there may be hefty early repayment charges, in other instances, for example with home reversion, it may be impossible to unwind. This is why it’s a regulatory requirement to seek financial advice before taking out an equity release product to ensure it is suitable for you and you understand the long term implications.
No negative equity guarantee
If you aren’t able to pay the monthly interest on the money you release from your property then the total amount you owe can grow significantly over time as interest starts to get charged on existing interest, compounding the effect. This could even mean that you would end up owing more than the value of your home. Thankfully this can be easily prevented by using a provider who has signed up to the industry trade body, the Equity Release Council who require all their members to sign up to a no negative equity guarantee. It’s therefore essential to only use an equity release provider who has signed up to be a member of the Equity Release Council and follows its code of conduct.
Fees and charges
In addition to the cost of the interest payments accumulating there are a number of additional fees and charges to be aware of. These include a financial advice fee, an arrangement fee to the equity release provider. Property legal and valuation fees; buildings insurance and ongoing property maintenance costs. These can add up to anywhere between £1,000 and 3,000.
What are the main risks of lifetime mortgages?
The main risk of a lifetime mortgage is that you (or your estate) could end up paying back a lot more than you borrowed in the first place, as interest charges mount up over time Lifetime mortgages charge interest both on the original sum you took out from your home’s equity, and on the interest added over time (a process known as compounding, as you pay interest on top of the interest already charged). This could see the amount you owe over the years build into an eye-watering sum. In turn, this can have a large impact on any inheritance you might want to leave your family. Have a look at our compound interest calculator to understand how much a lifetime mortgage might cost you over 10, 20 or 30 years.
Lifetime mortgages may also come with significant early repayment fees, so if you are thinking about getting a lifetime mortgage and repaying it early for any reason, such as moving onto a different deal, you may face a large fee. Make sure you fully understand the implications of any repayment charges before signing up to an equity release plan.
What are the main risks of home reversion?
The main risk with a home reversion plan is that you are likely to receive considerably less than market value for your home from the equity release provider. You’re paying for the benefit of not having to move and receiving this money, but over the long term, you essentially lose a portion of your home’s value. Typically with home reversion, you will only get between 30% to 60% of the market value of the part of your home that you sell.
Am I protected when using equity release?
Equity release can feel like a scary step, and it’s important to feel completely comfortable with all the potential downsides before taking the leap. However, one of the biggest myths around equity release is that it is unregulated, which is not true. The equity release market is covered by the Financial Services Compensation Scheme (FSCS), which offers consumers protection for financial services and products.
Any lender offering equity release products must be authorised by either the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA) and pay the FSCS an annual levy for its services. This means that if you take out an equity release product the lender will have paid the FSCS to provide a level of insurance for your money. Exactly how much you are covered for will depend on when the company failed, but you could be entitled to compensation for up to £85,000.
In addition to FSCS protection, reputable equity release providers are part of the Equity Release Council (ERC). This is a trade body that protects consumer interests through a number of safeguards which include a no negative equity guarantee (so you will never owe more than the value of your home), and the requirement to seek professional financial and legal advice before taking out equity release. It also includes restrictions on interest rates for lifetime mortgages as well as a security of tenure which means you can’t be forced to leave your home.
Where can I get advice on equity release
If you’re considering equity release, in the UK it’s currently a regulatory requirement from the financial regulator the Financial Conduct Authority (FCA) that you speak to a qualified financial advisor to ensure that it is suitable for your circumstances, and that you are making an informed decision.
It’s essential that you only use an advisor who is trained in equity release and can recommend a suitable product for you from a member of the Equity Release Council (ERC) to ensure that a number of minimum product standards are met, which help safeguard borrowers.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
If you’re looking for more information on equity release and how it works you can find more information in the following articles:
See how much wealth you could unlock from your home with this free, easy to use calculator. Fill in a few details to get an estimate – and if you’d like some advice, arrange to speak to an expert.