Is Equity Release Truly A Safe Option?
It’s safe to say that equity release isn’t the big bad wolf that’ll blow your house down anymore. You might be reading this because you’re considering equity release as a loan option. Well, we’re here to put your mind at ease. Thanks to all the safety features that comes with equity release, it’s an excellent way to loan money nowadays.
Don’t know what equity release is? Let’s have a look.
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. You can choose between lifetime mortgage and home reversion.
How Safe Is Equity Release Really?
Back in the day, late 1980s – early 1990s, equity release schemes had a bad name. This was due to increased corrupt industry practices. There were several deceitful lenders who undertook expensive deals that casued homeowners (and their properties) to owe them more than their homes’ value.
However, not to worry!
These corrupt actions of the lenders caused uncertainty regarding equity release. People weren’t so keen on it anymore. On the other hand, this resulted in something positive as well. Industry regulations became more strict.
The Financial Conduct Authority (FCA) helped to improve equity release processes due to their regulations and customer protection policies. Equity release is now so much safer than back then. Today, it’s an excellent valuable way for someone who is aged 55 or older needs extra cash quickly.
Equity release schemes or plans are monitored and controlled by the Financial Conduct Authority (FCA). Most providers out there are also members of the ERC (Equity Release Council), which is a trade body with high standards and the best customs and procedures for equity release companies as well as financial advisors.
To make sure you’re choosing the right plan, the council states that:
- Rates need to be fixed, and if not, the provider must have a maximum limit for the lifespan of the loan.
- You are allowed to live on your property you whole life or until you need long-term care. You simply need to abide by the rules of your equity release plan.
- You can move house, as long as your lender has approved the new property and that it offers the same amount of security for your equity plan.
- Lifetime mortgage plans need a ‘no negative equity’ guarantee. This means that when your property gets sold and you get less than your loan, you won’t have to pay in the balance. Please also take solicitors charges and agents fees into account.
The Equity Release Council safeguards you with their strict help on the sales process. They also only allow you to take out an equity release plan if you have good financial help or advice from independent money advice services.
Let’s cover no negative equity guarantee quickly.
No Negative Equity Guarantee
This guarantee protects you so that you don’t pay more than you owe to your equity release provider. However, when your lifetime mortgage plan comes to an end, the lender will sell your house and settle the loan amount plus any interest.
Let me tell you something.
If the estate market value decreases and the money can’t repay your mortgage, the lender won’t request more cash from your estate or heirs. Since you’ll be protected by the ‘no negative equity guarantee’, they aren’t legalised to do so. Therefore, consider the equity release firm that will offer you this protection.
Still doubting equity release to be a safe option? Read on.
You Can Retire Comfortably with Equity Release
Ever since equity became the big bad wolf in the late 1980s – early 1990s, trust levels have decreased immensely. Distrust filled the industry.
People are mostly very sceptical and nervous about these equity release plans. However, with various bodies like the ERC and the FCA who are now regulating the market and have great rules for providers, lenders and advisers, things are looking up.
Is Equity Release a Safe Option?
Although equity release is very popular as a financial product, there are still a few questions and uncertainties around it. You might be asking yourself: how safe is equity release really?
Here are 7 reasons why equity release is better than it used to be in the past, and why it could be the best thing in your life:
1. The FCA
FCA acts as an official watchdog for financial products. They oversee and monitor the industry in the UK specifically.
What does it mean for you?
They regulate financial product lenders, advisers, and brokers, as well as equity release products. They require that lenders/providers need to be registered and ensures that these providers stay within the rules stipulated in the code of conduct.
Thanks to the FCA1, you can now have sufficient and needed protections to look after your best interests. Equity release is especially safe nowadays. The FCA also provide you with a way to take legal action against the providers who aren’t meeting the requirements stipulated by them.
2. The ERC
The ERC, or the Equity Release Council, governs equity release specifically. They require their members to follow their strict code of conduct rules and regulations. So, you can rest assured that your money is protected, as well as your rights.
Some of their protection services are:
- Every consumer must get financial as well as legal advice to make sure that equity release is the best way to go.
- All plans need to have a ‘no negative equity guarantee’. This ensures that your family won’t have need to pay back outstanding money (if your house sells for less than your loan value).
- You are allowed to live in your house your whole life if you want to.
- If you want to take out equity, one or two face-to-face meetings are required by the ERC. These meetings need to include an independent solicitor who will also handle the legal aspects of the equity release process.
If you want to take out equity release, make sure that your provider is registered with the Equity Release Council. Then you’ll know that your finances are safe and secure under the ERC’s protective services.
3. Your Family Won’t Be Buried In Debt
If you’re thinking about taking out a lifetime mortgage and it’s with an approved equity release lender, you will most definitely need the no negative equity guarantee to safeguard your family.
The ‘no negative guarantee’ was created solely for protecting you. Simply put, it helps you so that you never need to pay more than your property value. Better yet, your family won’t have to settle your debt once you’re gone.
Let me tell you something:
If the value of your property decreases significantly and you get less selling it, the equity release provider is required to write that off when you die.
4. You Can Live In Your House
Some people don’t know anything about equity release and its pros and cons. Well, if you’re one of those people, you should know that you are allowed to remain in your home for the rest of your life, even after you’ve released equity from your property.
When it comes to lifetime mortgages, you get to stay in your house. And you don’t even have to sell part of your house to get the money you need. You’ll be borrowing it against equity.
For this reason you can continue living in your house (of which you’re the owner) for as long as you want to.
Best of all…
As the ERC’s rules state, when you want to release equity from your house and it’s a joint partnership, you’ll still be the sole owner. That is, until both parties die, or go into long-term care.
5. You Can Move To A New House
Unlike popular belief, taking out equity from your home doesn’t tie you up to that home for the rest of your life. If you want to move into a new house, you absolutely can.
The ERC gives you the right to take your equity release plan to your new home, as long as you’re moving to a satisfactory home that meets your providers rules. However, you’ll need to move to a cheaper home if you don’t want to pay in the difference. It all depends on your provider though.
6. You Must Consult an Advisor
The ERC requires that you ask a professional for advice before you can apply for an equity release plan.
Furthermore, this professional adviser should be a qualified equity release consultant. The Equity Release Council keeps a directory so that you can confirm they’re qualified.
7. Your Estate May Retain Inheritance
As you know, equity release loans need to be repaid when your house gets sold by your provider, plus interest that its accrued. You should also know that this will decrease your inheritance.
If there’s money left after the loan has been repaid, your heirs (according to your will) can receive that.
If you want a guaranteed inheritance for your loved ones, your provider should have a specific plan available to ring-fence an amount of your property’s value. Simply let your adviser know, so that they can provide you with an equity release plan that’s suitable for your specific needs.
Equity Release Is Very Flexible
As you know, traditional mortgages aren’t so flexible. However, equity release schemes give you peace of mind. Most of the time, equity release schemes don’t ask you to make any repayments. Therefore, you can’t get into arrears and your property can’t be repossessed. Now:
Are equity release schemes safe?
Because the equity release market is growing continually, and more equity release products are busy entering the market daily, most lenders offer greater choices.
These products include:
- Fixed-rate schemes for life, so you’ll always know the amount to pay back at the end of your scheme.
- Fixed early repayment charges, so you‘ll know the exact amount of money payable for penalty, if you want to make early repayments to your plan.
- Plans that allow you to pay ad hoc voluntary. These, in the long run, will help you to manage your future finances.
- Downsizing protection features that ensure you can repay your equity release plan, with no penalty charges. However, only if you move into a new home after five years from the beginning of your plan.
If you’re still unsure about the security of equity release, have a look at how far it’s come and how much it’s improved over the years.
How Equity Release Evolved
Since 2015, equity release interest rates have decreased immensely – and that low interest rate can be constant for life.
Best of all:
How much interest you pay when your plan comes to an end will depend on the length and type of your scheme or equity release plan. It’s vital that you remember – equity release plans end when you pass away or move into old-age care.
When it comes to a limited lifetime mortgage plan, and you don’t make monthly settlements, your interests will increase quickly. All interest you owe will be added to your overall loan amount annually. From that time onwards, it’ll grow.
What does this mean for you?
You absolutely need to remember to choose an equity release plan that has a “no negative equity2”promise. Why? Well, it ensures that you and your family don’t owe more than the value of your property.
Yes, there are a few alternatives that’s safer and less risky to get extra cash instead of equity release. You can downsize, you can sell your other assets, you can rent out a room in your house or change your job. These are only a few alternatives, but there are more. Getting a grant, as an example.
There’s a risk to almost everything in life, and equity release is no exception. It’s important to note that you’ll have to pay the full market price of your property when your mortgage comes to an end. Therefore, it means that you’ll be receiving less money than you would by selling your house on the open market instead.
It could be a safe idea because the ERC is there to protect you from bad providers and cons. The FCA is also on your side to protect your rights. However, it could be unsafe for your heirs’ inheritance.
It’s not a con. It’s a very good way of getting extra tax-free cash without having to move out of your house. It’s safe in the sense that it’s not a scam. However, you need to assess your financial situation to determine whether or not it’s the right option for you. Equity release is a great way to get some extra money when you need it, and it’s a safe option.
Equity release can be a great option in the right situation. However, before making any final decisions, it’s imperative that you understand what’s involved and whether equity release is right for you.
With that in mind, you should always ensure that you seek advice from an independent adviser, who’ll talk you through the details, thus helping you make an informed decision.
If you have any questions on the safety, eligibility, and workings of this, be sure to click here not only to see how much equity you can release but also to chat with an expert.