Equity release is an increasingly popular way to release cash that is tied up in your home. For people over 55, it can offer an important injection of cash to maintain a good quality of life or be used for things home improvements, to top up your pension, pay for a wedding or a holiday home.
Some people have a bad experience with equity release and there may be some companies to avoid, so Lending Expert have put together this useful guide to make sure you know what to look for when applying.
Which Equity Release Companies Should I Avoid?
There are no specific equity release companies to avoid, but you can certainly look out for warning signs and also you should make sure that you fully understand the terms and conditions and what scenarios could play out. For instance, if you want to move house again or you are very keen to put money aside as inheritance, these are things to consider from the very start, and not before you have signed an agreement.
You should look out for:
- Expensive broker fees – there may an introducer fee but this should be capped at £1,500
- The right to move home at no extra cost
- The right to keep your home
- The right to put money aside as inheritance
- Competitive rates from 3% per month – capped and fixed
- Clear and sensible early settlement fees
- A no-negative equity guarantee (the debt will not be higher than the home’s value)
- Lenders must be FCA authorised
What is Equity Release?
Equity release allows you to sell off part or whole of your home and receive a large cash amount – perfect for people who are retired and need some extra money to maintain their lifestyle.
If you own a home or property and have spent years paying your mortgage or have paid it off in full, you have a lot of equity now tied up in your home. But if you need money day-to-day, using equity release can help you ‘release’ this money so you can use it for everyday purposes.
The best part is that you can continue to live in your home until you die or go into long-term care, and this applies to your spouse or partner too. The amount you receive is tax-free, you can still move home if you want to and also put money aside for inheritance if you want to.
There are more than 100 types of equity release but there are typically categorised as either a lifetime mortgage, where you release 20% to 60% of your home’s value, or a home reversion plan where you physically sell off a stake in your house.
Why Do Some People Have a Bad Experience With Equity Release?
- The interest can start to add up over time
- You could lose value in your home
- Reduces the amount of money for their children’s inheritance
- Loss of means-tested benefits
- Income tax implications
- The potential financial burden for your children
Equity release is like a loan, so once you receive the money, you are paying interest on it each month, starting from around 3%. This interest can start to add up if you live longer than expected, such as another 20, 30 or 40 years and you may find that this starts to eat away at your savings and leaves very little for your children as inheritance. With so many variations, you can get a drawdown equity release mortgage, where you can drawdown money whenever you want and only pay interest on what you use.
You want to find an equity release product that allows you to benefit if your home goes up in value. Especially if you live in a sought-after area, the likelihood of your home’s value increasing in the next 10 or 20 years could be really significant. Plus, you may wish to pass this onto your children as a good family investment. If you are paying too much interest for your equity release scheme or you have sold off part of your home (with a home reversion plan), you will not benefit if the property increases in value. This is certainly something to consider when applying and how to find the right product to account for this.
There is also the possibility of losing your means-tested benefits, since equity release can be classed as income and therefore makes you ineligible for state benefits. This is not always the case, but it is something that you should check beforehand.
Similarly, whilst equity release is tax-free, it can affect your income tax liability if you are still earning some kind of income elsewhere. You may need to speak to your accountant to avoid paying more tax than necessary.
When you die or go into long-term care, your equity release loan is essentially up for repayment and the lenders will usually give your children or estate up to 12 months to make the full repayment.
The amount outstanding should not be higher than the value of the home due to a scheme known as ‘no-negative-equity guarantee.’ So for the very least, selling the home should cover all the outstanding repayments. However, there can be circumstances where the house has lost value, the family has other financial obligations or the family wants to keep the home, in which case they will have to come up with the money in other ways e.g renting it out or getting a second mortgage – and this can add some extra pressure.
Must The Equity Release Lender Be FCA Authorised?
Yes, your equity release provider must be fully authorised by the FCA and this is something that you can check on the FCA register.
Your lender should also be a member of the Equity Release Council to ensure that they are regulated and that you will be protected financially.
If you do not use a lender who is FCA registered or a member of the Equity Release Council, you potentially risk getting any compensation if things go wrong.
Should I Speak to a Financial Advisor?
Yes, whilst it is not an obligation, it would not hurt to speak to your financial advisor to ensure that you get the most of out an equity release scheme. It would be worthwhile to consider your financial plans and requirements over the next 5, 10 or 20 years whether you intend on moving house again, going into care or giving money to your children as gifting or inheritance. With the help of a financial advisor, you may find the right equity release product that suits your needs and therefore there are no surprises further down the line and it is a very seamless process for your children to take over your home and finances.