Equity release schemes continue to grow in popularity as more and more homeowner in the UK looking for ways to boost their retirement income. Last year, Brits released £3.92 billion in equity from their homes, and the market is set to keep growing.
But how does it work? Homeowners over the age of 55 can opt into an equity release to access the wealth locked up in their property.
Using the value of your home as security, equity release allows you to borrow a lump sum or withdraw a steady stream of income without making any repayments.
The loan and any interest are generally paid off when you die or move into long-term care.
Continue reading to get the full details on how safe equity release is.
Is Equity Release Safe?
Equity release is perfectly safe, but as with all significant financial decisions, it is important to carry out thorough research before committing to anything.
The Financial Conduct Authority regulates all legitimate equity release providers in the UK. This regulatory body sets minimum standards for lenders which makes Equity Release very safe for consumers.
The Ombudsman has the power to investigate complaints and compel lenders to refund customers or take other action if they have done wrong.
Many equity release providers are also members of the UK’s Equity Release Council. All ERC members offer a ‘no negative equity’ guarantee, which ensures that you can never owe more than your home is worth. This is an important safety feature to look for. Otherwise, there is a risk your family could be left with debt at the end of the loan term.
When you are shopping for an equity release scheme, you can check if a provider is an ERC member by calling or emailing the council.
Pitfalls of Equity Release
Equity release might be the right financial decision to help you enjoy your retirement. However, there are some long-term effects of equity release schemes which are essential to consider before rushing into a decision.
Pitfalls that people may fail to consider include:
Early Repayment Fees
When you sign up for equity release, you should be confident that it is the right decision for you. Many schemes have high early repayment fees, which in some cases may reach as much as 25% of the total borrowed.
It is important that you understand and are committed to the idea of equity release before going ahead, as a change of mind can be very expensive.
May Reduce What You Can Leave an Inheritance
If your property makes up most of your estate, releasing equity on your home is likely to reduce what you leave as an inheritance. Unlike a mortgage, you don’t make monthly repayments on an equity release loan.
Because you aren’t paying off the principal, interest accumulates quickly. By the end of the loan term, your debt plus interest may end up being worth almost as much as your home.
If you are concerned about equity release eating into your estate, you can choose to ring-fence some of your property, but this will reduce the amount you can borrow.
Borrowing Too Much, Too Soon
If you take out a lot of money early on, your loan will quickly start to accumulate interest, and that interest will also have longer to grow. There is also a chance that you could ‘max out’ your loan early on, which could land you into trouble if you run into unexpected expenses later on.
Most providers of lifetime mortgages offer a drawdown facility, which allows you to withdraw small sums of money as needed up to your equity limit.
Doing so keeps interest to a minimum and enables to leave some money ‘in the bank’ in case you need to dip into it later.
You May Lose State Benefits
When you release equity from your home, it is considered as part of your income. This can affect your eligibility for means-tested benefits, such as pension credits or council tax reductions.
Negative equity is when you owe more than your home is worth. This can result in the debt being passed on to family members at the end of the loan term, or your remaining assets being claimed by the loan company.
Negative equity used to be a common risk with equity release schemes, but these days most providers offer a ‘no negative equity’ guarantee.
However, this is not a legal requirement- so always check that it’s included.
Protecting Yourself From the Pitfalls
Many people release equity without suffering from any of the scheme’s potential drawbacks.
Before you decide to release equity on your home, arm yourself with research and consider taking simple steps to help make your equity release plans unfold as smoothly as possible:
Look for a No Negative Equity Guarantee
This ensures you’ll never owe more than the value of your home. All Equity Release Council members offer a no negative equity guarantee, and many other providers do too.
Read the Terms and Conditions Carefully
Think about your circumstances now and how they might change in the future when reading the terms and conditions. For example, if you think you might want to move house one day, does your plan allow for this?
What about if you’re going to start paying off some of the interest on your loan, is there a fee? Taking things slowly before you sign up to a plan could save you a great deal of disappointment and expense in the future.
If you aren’t sure what you should be looking for in the contract, consider speaking to a legal professional or independent advisor.
Consider Using a Drawdown Facility
If you can afford to, consider using a drawdown facility. This allows you to withdraw small amounts of equity when you need the money- rather than taking it all out as a lump sum.
In doing so, you will only be charged interest on the smaller amounts you have withdrawn, which could save you tens of thousands of pounds over the lifetime of the loan.
Discuss Your Decision With Close Family
Some people may feel uncomfortable taking out equity release plans because they are worried about not being able to leave their children an inheritance.
According to Key Retirement Solutions, up to 90% of equity release customers now consult with their children before taking out a plan. Talking things through could put your worries to rest.
At the same time, it is helpful for the family to know that a scheme is in place on your property, so they know what to expect when dealing with your estate.
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.