Equity release has risen in popularity over the past few decades, however, it has also received some negative press regarding consequences years down the line following taking out such a financial policy.
In this guide, we will explore what equity release is, the types of equity release as well as the pros and cons of this type of financial product.
What is Equity Release?
Equity release is the method of withdrawing the equity owned from property to turn it into a cash lump sum, a source of regular income, or a combination of both.
Following undertaking an equity release, the homeowner can continue to reside in the property up either until the sale of the property, the move into a care home, or death. Usually, the capital plus interest due to the equity release financial product is repaid by selling the property.
Equity release is usually only available to those over 55 years old and a mortgage does not need to be fully repaid on a property to be able to explore equity release as an option.
There are no repayments due on the financial product until the sale of the property which can be appealing however there can also be disadvantages of this type of financial decision.
Legislation of Equity Release Financial Products
Following a period of negative press regarding equity release products, the market was tightened and a regulation body, The Equity Release Council, was established. Following this change, the reputable companies offering equity release products have become members of the council.
Types of Equity Release
There are two types of equity release products available on the market:
- Lifetime mortgage – A lifetime mortgage is the most common type of equity release product. It is the process of obtaining a secured mortgage against the main residential property. The lifetime mortgage holder continues to own the property and often continues to live within the property until the sale or death, whichever comes sooner, at which point the mortgage capital and interest due is settled.
- Home reversion – This option involves part or all of the property being sold to a home reversion provider in exchange for a lump sum or regular payments. The person concerned continues to live within the property however there is an agreement to maintain and ensure the dwelling. A percentage value of the property can be ring-fenced for later use, such as inheritance, however, once the property is sold, the home reversion company will receive the proceeds of their share.
Advantages of Equity Release
Equity release is continuing to see a sharp increase in popularity due to the many advantages it offers, these include:
- Tax-free Cash – Any money released with an equity release plan is tax-free. It enables you to gain access to a lump sum of money, a regular income, or support your pension.
- You can stay in your home – One of the main benefits of equity release is that you are able to stay in your property, this beats the typical route of having to sell and downsize. This is a perfect option for those who want to avoid the inconvenience and stress of moving.
- Fixed interest rates – The interest rates on equity release loans are fixed for the entire term of the loan, which provides the security that you will know exactly how much you owe at the end of the loan period.
- No monthly repayments – If you want to avoid monthly repayments, you can with equity release. The total amount is paid off in full when your property is sold after you pass away, move into a full-time care facility, or sell the property.
What are the Disadvantages of Equity Release?
Although very popular, equity release can have negative consequences such as:
- Negative equity – Consequences of utilising an equity release product before tighter regulation of such products was introduced was that some homeowners found themselves in a negative equity situation. Negative equity occurs when the total amount owed to lenders is higher than the property value. This can occur during periods when property prices have crashed. However, following the establishment of the Equity Release Council, the member companies now offer a no negative guarantee to remove this risk.
- Cost – The costs involved with equity release products can vary between equity release lenders, however, depending on the duration of time that the financial product is in place for, and the option is chosen regarding either paying accruing interest regularly or rolling the interest liability up until the end of the policy, the costs can escalate. Due to the variables involved it is always worth calculating the total costs of equity release products before committing to ensure that it is viable. It would also be worth seeking independent financial advice to discuss the costs involved against other options to ensure that an informed decision is made before committing.
- Income Tax – Depending on the amount drawn from equity release products, as well as other personal circumstances, there could be income tax implications and therefore it is important to seek independent financial advice or specialist tax advice to establish any possible tax liabilities before committing to an equity release product.
- Loss of means-tested benefits – Depending on the personal circumstances of the applicant and the amount of equity release that they are seeking to draw upon, they could lose access to means-tested benefits. Should there be any concerns regarding benefit access and eligibility, exploring the government website or seeking advice through citizens advice would be the best approach to find out more information?
- Loss of Inheritance – The amount of inheritance available to pass onto family members from a property with an equity release policy secured to it will be reduced. The level of the reduction will depend on; the amount of loan taken through the equity release, the interest rate and the method chosen to repay the interest, as well as the property prices at the time of sale. Not all of these factors can be planned for although some equity release products allow a percentage of the property value to be ring-fenced for passing onto family through inheritance. Due to the nature of the ramifications for other family members, it is strongly advised that homeowners seek independent financial advice ahead of any equity release applications.
Equity Release Companies to Avoid
Should an equity release product be the most appropriate financial option and a homeowner is ready to apply, a check should be undertaken to ensure that the chosen lender is a member of the Equity Release Council.
There are many companies on the market offering equity products however for the most protection, always avoid those who are not members of the Equity Release Council and therefore do not offer:
- A ‘no negative equity’ guarantee.
- Protection to vulnerable customers.
- Sensible, competitive interest rates.
- Sensible early settlement fee structures.
- Fixed interest rates.
- The right to remain in your property for life.
- The right to move to a different property.
Equity Release Companies to Avoid Summary
Although the equity release sector has faced significant tightened legislation over recent years, there are still many factors to be considered and fully understood before committing to such a financial product.
In addition, other lending options may wish to be explored and compared before selecting a choice, and therefore it is always worthwhile to seek independent financial advice for support in researching and pricing the various options available.
Call us today on 01925 906 210 or contact us. One of our advisors can talk through all of your options with you.