Equity release is a financial product that allows eligible homeowners aged 55 and over to release some of the equity built up in their property without having to move home or commit to monthly repayments.
When it comes to equity release you may be wondering “Is this right for me?” or even “Is equity release safe?” We understand equity release is a big decision and it is important you gather as much information as you can before making a choice. In this guide, we will take you through the ins and outs of equity release explaining to you the equity release safeguards, product flexibility, the pros and cons of equity release as well as the alternatives to equity release.
Firstly it is important to point out that other options are available to you. Always seek independent advice that is tailored to your specific needs and requirements. If you are thinking of consolidating existing borrowing you should be aware that you may be extending the terms of the debt and increasing the total amount you repay. The actual rate and fees charged will depend upon your circumstances.
What to Consider
- The money released from your property, along with any interest accrued will need to be paid when you die or go into long-term care. For joint borrowers, this is based on the last person passing away or moving into long term care.
- You will be required to receive financial advice before deciding to go ahead with the equity release.
- Consider your alternatives, equity release isn’t always the best choice for everyone.
- Consider speaking to family and friends before making a big financial decision alone.
The Equity Release Council (ERC)
The Equity Release Council represents the equity release sector and exists to promote high standards of conduct and practice in the provision of and advice on equity release which have consumer safeguards at its heart. When working with an equity release broker, or going directly through a lender, it’s important to check they’re members of the Equity Release Council. Members of the Equity Release Council will need to ensure the products they offer their customers meet all five of the following standards.
- A fixed (or capped) interest rate for the life of the loan.
- The right to remain living in their own property.
- The right to move your plan to another property (subject to lenders criteria)
- A no negative equity guarantee means you will never owe more than the value of your home.
- The right to make voluntary penalty-free partial repayments.
Advantages and disadvantages
It is important homeowners understand the pros and cons of equity release before making any decisions.
Advantages of equity release:
Fixed or capped interest rate for the life of the loan
With a lifetime mortgage, the interest rates must be fixed for the life of the loan or if rates are variable, there must be a ‘cap’ (upper limit) which again is also fixed for the life of the loan.
You’ll never owe more than the value of your home.
Products approved by the Equity Release Council must have a ‘no negative equity guarantee’. This means that regardless of how much interest accrues, even if the amount left isn’t enough to repay the outstanding loan to your provider, you won’t owe more than your property is worth. No debt will also be transferred your family.
You can stay in your home.
With equity release, you still maintain ownership of your property. This means you can continue to live and retire in your home. You will have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract.
You don’t have to make any monthly repayments
With a lifetime mortgage, no repayments are required until you die or go into long term care. There are options however for you to make payments against the interest and the loan. You can even pay the loan off in full if they wish.
You could potentially reduce your inheritance tax
When releasing equity from your home, the value of your estate will reduce, which can reduce your inheritance tax liability.
The alternatives to Equity release
Not only should you consider the pros and cons of equity release, but to make sure you’re making the best choice for your financial needs, you should consider your alternatives as equity release isn’t right for everyone. Some of these alternatives consist of:
- Downsizing
- Retirement interest-only mortgages (RIOs)
- Loans whether they be secured or unsecured
- Remortgaging your residential mortgage
- Renting out a room in your home for additional income
- Existing savings and assets
Flexible product features
which is the most popular type of equity release, comes with a range of product features making plans a lot more flexible to your needs and circumstances.
Enhanced lifetime mortgage – If you have health problems, you may be able to access a higher amount of tax-free cash as lending criteria are based on your personal health records. Your Retirement Solutions equity release adviser will be able to provide you with more information.
Downsizing protection – If you decide in the future that you want to move to a new property, you may be able to pay back the lifetime mortgage without facing a penalty, this exemption is not offered by all lenders and the terms may differ from lender to lender.
Inheritance protection – For some people, leaving an inheritance for their family and loved ones is important. A protected lifetime mortgage allows you to ring-fence a percentage of your property value for your loved ones. This percentage will be given to your loved ones regardless of how much interest accrues. However, if in the future your future health care needs funding, this ring-fenced percentage could be used to cover this.
Disadvantages of equity release:
It can affect your benefits
If you are entitled to means tested state benefits, you could be affected when releasing equity from your home. An independent adviser will be able to advise on this in more detail.
Your debt will increase due to interest
If you don’t choose to pay off the interest on your equity release plan, the interest is added to the amount owed, then future interest will also be calculated against the new amount owed. This is known as compound interest.
You might have to pay early exit fees.
If you choose to repay all or part of the loan early there may be an Early Repayment Charge.
You can’t take another loan against your house.
A lifetime mortgage is a loan secured against your home. No other loans can be taken out against your house once you’ve taken out equity release. Some providers may allow you to release additional funds later if there is sufficient equity in the property.
Your family could receive a smaller inheritance
When choosing to release equity from your home, some, or all the value of your home will be used to repay the provider when you die or go into long-term care. This means family and loved ones could receive a reduced inheritance or less than they expected. You can however opt to protect and guarantee a certain portion of your home’s value as an inheritance for your family thanks to inheritance protection.
Speak to an independent adviser
At Retirement Solutions we believe in providing our customers with the best later life advice possible. To achieve this, we offer to visit our customers in their own home to discuss their personal objectives and answer their questions, encouraging family or friends to be present as well. Our customers are also under no obligation to proceed after their appointment if they so choose.
Our specialist team of advisers has been selected because of their training, experience, and commitment to high levels of customer service. If equity release is right for you, our team provide a written customised recommendation based on your circumstances. Of course, if a specific path is not the right way forward for you, we will tell you.
To book an appointment give us a call on 0800 043 0725 or click here to request a call back at a time and date most convenient to you.
