Financial products usually have their downfalls – even if you have all economic freedom. There will always be risks and disadvantages that you need to be aware of.
If you’re considering the pitfalls of equity release, read on!
Everything You Need to Know About
So, if your house or property has been paid off in full, or just 60% thereof, some providers can get a plan so that you can release equity in your house. You won’t be required to move out of the house either.
Best of all:
The extra cash can give your pension a nice boost, it can pay off some debt you might have, loans can be paid off, or you can go into retirement early. Another perk of the extra cash is that you can do some renovation work on your home, you can go on a magnificent holiday with your kids or friends, and your more prominent family.
What Is Equity Release?
Equity release refers to your property’s items/parts that let you access your money tied up in your house. However, you can only gain access once you’re 55 years or older. You can get the capital value of objects in your home as a lump sum or an income based on the house’s value. You’ll just need to repay that money you accessed at a later stage.
There are two kinds:
1. Lifetime Mortgage
The first type of equity release is a lifetime mortgage. This type lets you take out a mortgage on your home if it’s your primary residence. However, you will remain the owner. You’ll have the option to ringfence part of your property for your family to inherit.
2. Home Reversion
The second type is a home reversion, which means you sell some of your property or your whole property. You can sell it to someone like a home reversion provider, and they’ll pay you a lump sum for it, but they can also pay you in regular payments. It’s your choice.
Let’s investigate the Equity Release Council.
The Equity Release Council
After looking at equity release as a form of borrowing money, it’s clear that some risks are involved. So, to keep your finances safe and secure, the council1 has set up a code of conduct so that you can have peace of mind.
They’re an industry body taking care of everything equity release-related. It’s self-regulated, and they’re a non-profit organisation. Starting as SHIP (or Safe Home Income Plans), they relaunched and redesigned themselves as the Equity Release Council in 2012.
Now, their services include:
- Telling you everything you need to know about equity release and all the products related to it.
- Protecting and safeguarding you throughout the process, and they also protect your finances.
- Spreading the word about equity release being a form of income once you retire.
- Representing hundreds of firms and members within the equity release industry. These include advisers, lenders, solicitors and surveyors, for example.
You might be asking yourself:
Is equity release safe? Well, to be honest, it’s much safer now than it used to be. Thanks to the Equity Release Council, you’re safer than ever. Their policies are specifically created to protect you and to safeguard you.
The Policies of the Equity Release Council
You’re guaranteed the right to stay in your home as long as you wish. You can stay in your home your whole life if you want to do so. Another option is to move houses and transfer the equity release plan without paying a fine (thanks to their downsizing protection policy).
The council also offers a No Negative Equity Guarantee, which is excellent! Why? This guarantee ensures that the mortgage amount plus accumulated interest will never be more than the value of your property. In other words, the homeowner is protected when the property market takes a turn for the worst.
The FCA2 is also there to protect you. Their job is to ensure your provider and advisor follow the rules to the T. So, you don’t have to worry. You’re in good hands when it comes to Equity Release.
What are the Pitfalls of Equity Release?
We’ve out together a list of pitfalls for your peace of mind.
1. ‘Rolled Up’ Interest
When it comes to lifetime mortgages, the most common scheme offers you money according to your property’s value. These are usually at a fixed rate interest.
Listen to this:
Lifetime mortgages are more popular than home reversion interest. Why? Because they don’t require you to pay interest monthly when you’re repaying your loan. The interest is ‘rolled-up’, and it’s payable as a large compounded amount at the end of your lifetime mortgage.
You can choose to keep the level of interest at a low by withdrawing equity (drawdown) or going with a once-off capital mortgage (lump-sum). A combination of both is also possible. Depending on your provider, of course, make sure that they tell you exactly how your option works, and it’s potential regarding interest. Make sure you get all the advice you need from them.
2. A Reduced Inheritance
When you take out equity from your home, it reduces the merit of your estate. This means you get a decreased inheritance for your heirs.
That being said, you don’t have to worry. There is a way to secure your inheritance, and it’s called ‘the inheritance protection.’
Aviva and More2life, among other equity release providers in the UK, offer many safety features. When you choose the amount of your estate you want to secure; the pitfalls of some equity release plans allow you to get a quota of the property worth to continue being sold.
If you want to have a more significant percentage secured, you’ll most likely get a lowered maximum loan amount if that sounds like something you’d consider, feel free to ask an adviser for some financial advice.
3. Release Limits
In 2018, homes started to be appraised more, almost 20% more, depending on the circumstances. As population levels grow and the economy inflates, this is happening more and more.
Let me tell you something.
If you have a large amount of equity release cash on your property, it might be that you won’t be able to release that much. Instead, you’ll have access to considerably less in the end.
Most equity release plan providers wait more than ten years to be repaid. Due to this reason, there are significant “discounts”. And another pitfall is that if you’re young and healthy, you’ll be eligible for less equity.
4. You Don’t Benefit From Increasing Property Market Values
Home reversion plans work in the way of people selling a portion of your home or their entire property to an equity release provider or lender. After selling a part of their home or their entire property, people receive a cash lump sum, and they can remain in their home at the same time. It’s also shared ownership of a home. The equity that’s released from the property could be something to think about, especially when it comes to negative equity.
And another thing:
Your provider will get a portion of the money from your property when they sell it. Meaning, you and your loved ones won’t benefit from the full money from the house. Therefore, it’s best to get advice from an expert so that you get the right information.
5. Early Repayment Charges You Should Know About
As their name states, Lifetime mortgages don’t have to be paid during your lifetime and while you’re the owner of the mortgaged house. You should also be prepared because you could run into a large sum of debt very quickly.
Consequently, they can have fast repayment charges if you’re repaying them before you pass away. This can put you in debt. So it all depends on your income. Look very closely before you take out this loan, you don’t want to make a mistake and end up with a load of debt.
But let me tell you something.
The new plans mostly have fixed-term advance arrangement payments as an option. It means that you can decide to close it or change it a few years into the plan.
6. Benefits Are Affected
By releasing the equity from your property, you increase your income or your savings. However, this might, in turn, have adverse effects on you means-tested benefit claims. You must do your research to find out exactly how they’ll be affected so that you don’t get a nasty surprise.
7. Extra Fees to Pay
If you require extra capital to help your finances once you retire, equity release is quite an adequate remedy. But, you need to find out what other options you have that don’t require extra fees. Other options don’t include interest charges, for example, that might suit your needs better.
You can downsize to a smaller home, or you can try to borrow some cash from your friends or loved ones. Get as much information as you can regarding these other alternatives. Our article ‘11 Alternatives to Equity Release‘ will explain that very well.
There are so many kinds of equity release plans, and you’ll need to pay some fees: initial charges like financial advice tax, solicitor’s tax, and provider tax, and holdings valuation tax. Different companies and providers have other costs, so just look into that.
You might be wondering…
Why do I need an expert’s advice, and why do I need to pay for one? Well, some providers require that to get an equity release plan. After getting the right direction, you’ll know for sure if it’s the most suitable for you and your future.
It’s only a safe idea if you’ve considered it carefully and assessed your financial situation thoroughly. Ask for professional advice before making a decision.
That being said, it’s an safe way to get some extra cash without having to move out of your current residence.
In a way, you could see it as risky. However, not in all cases. While interest rates are the lowest they’ve ever been, equity release in itself a bit expensive and a dangerous way to raise cash if you don’t consider all the elements regarding this type of loan.
As with anything, there are always pros and cons. With equity release, the cons are: rolled-up interest, reduced inheritance, release limits, decreased benefits, extra charges and early repayment costs. However, don’t forget the pros!
Your state pension won’t be affected. However, your pension credit will be affected, and you might lose your means-tested benefits. So you’ll need to determine whether losing these benefits is outweighed by the benefits of equity release benefits or not.
Almost 40,000 homeowners all over the UK, aged 55-year-old or older, have been releasing equity to give their finances a boost from their property. There are other types of mortgages as well: retirement interest-only plans, and more.
Answering the question: “Is equity release right for me?” Well, you’ll need to do proper research to figure it out. Consider all your options carefully, and ask different providers about their options etc.
Please ask an expert for advice and don’t put yourself in debt. Read ‘Equity Release Process‘ and any of our articles to find out more.