Is Equity Release a Good Idea?

older couple hugging

As we approach later life, we can sometimes feel like we are missing some of life’s experiences. Over our lifetimes we tend to accumulate wealth, normally in the form of assets such as cars and houses.

Unfortunately, the money tied up in bricks and mortar is difficult to access without selling the property or using a specialist mortgage product. For many, Equity Release provides an attractive prospect to free up finances and enjoy retirement with more disposable income.

Let’s explore Equity Release and find out whether it is a good idea for you.

How Does Equity Release Work?

Equity Release is a mortgage product designed for older people. Specifically, you will need to be over the age of 55 and either own your own property or be purchasing one. If you own a property, any existing mortgage will need to be redeemed on completion.

Types of Equity Release Product

In the UK there are two types of Equity Release product. Lifetime mortgages and Home Reversion Plans.

With both products, as long as they are regulated by the Equity Release Council, you will have permanent rights to reside in your property until you pass away or move into long-term care.

With a Lifetime Mortgage, a lender will place a secured charge on your property. Whereas, with a Home Reversion Plan, the lender will effectively own a portion of your property on completion and benefit from any equity gains.

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Lifetime Mortgages

Lifetime mortgages are the most common Equity Release product in the UK as they represent better value for money for most borrowers.

With a Lifetime mortgage, the lender will allow you to borrow money against a set amount of equity you hold in the property. For example, you may be able to borrow 50% of your property’s value.

When you borrow the money, the lender applies an interest rate that rolls up over the remainder of your life. When you pass away or require care, the interest and loan become payable. To prevent the interest from compounding, you can make voluntary payments to service the interest. You may also be able to overpay to clear a portion of the capital from the lifetime mortgage balance.

Most lenders currently allow overpayments of up to 10% of the outstanding balance per annum without early repayment charges.

Home Reversion Plans

Home reversion plans are less common because people find that they generally represent poor value for money. With a Home Reversion Plan, the provider will buy the equity from you upfront.

For example, they may offer to buy 50% of the equity you hold in your home. The downside is the provider will not offer you market value and, in most cases, a Home Reversion Plan offers far below market value for your equity.

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Other Options Available

If you have just turned 55, you may be tempted by an Equity Release product and not realise there are more conventional options available. A whole-of-market mortgage and equity release broker, like Boon Brokers, should be able to provide all suitable mortgage options for you to consider.

You will still in most cases be eligible for a traditional mortgage product.

Equity Release may be more suitable when you are too old to apply for a traditional mortgage product.

Another option is to downsize to free up money. Downsizing to a cheaper property will give you a chunk of money without the financial commitment of an Equity Release product. However, you may have to accept a worse standard of living by downsizing.

Benefits of Equity Release

Unlike a traditional mortgage product, an Equity Release product has no compulsory monthly payments.

You can opt to make overpayments or early repayments on your Equity Release product, but these are optional.

This means you have a greater degree of financial flexibility in later life compared to borrowing money and worrying about keeping up with repayments.

You will also be able to reside in your home until you die or move into long-term care. This is an aspect of Equity Release that is particularly attractive if you have fallen in love with your home and want to reside there for the rest of your life.

Lastly, Equity Release is particularly good if you have no next of kin and are primarily concerned with living comfortably in older age. The old saying ‘You can’t take it with you when you die’ is true and Equity Release allows you to liberate some of the money tied up in your property.

Risks of Equity Release

Equity Release is a financial product, and it is also a significant financial decision. There are risks when taking any financial product.

Firstly you should check that the Equity Release provider you are using is registered with the Equity Release Council. This is because some providers who are not members of the Equity Release Council offer subpar products that could leave you in negative equity or not allow you to live in your house indefinitely.

Negative equity is a significant problem for anyone who must deal with it. It occurs when the loan is greater than the valuation of the property. With negative equity, your next of kin will have an outstanding debt after the property has been sold.

Providers registered with the Equity Release Council offer a no negative equity guarantee, so even if the loan exceeds the property value, the excess is written off.

You have some protections when taking Equity Release and you are always able to complain to the Financial Ombudsman if you feel you have been treated unfairly.

These protections however are only as good as the rules outlined by the Financial Conduct Authority.

It was for this reason that the Equity Release Council was established to create a fairer and more transparent Equity Release market. Currently, 90% of all Equity Release providers are members of the Equity Release Council.

Are All Equity Release Providers Registered with the Equity Release Council?

Unfortunately not. Around 10% of the current Equity Release providers are not members and can offer products that are unfavourable compared to council members.

Speak to an Equity Release Specialist

You should always be given comprehensive advice when taking an Equity Release product.

Boon Brokers is a Whole-of-Market Mortgage, Insurance and Equity Release brokerage. Boon Brokers provides fee-free Equity Release advice.

Contact Boon Brokers to book your no-obligation Equity Release consultation today.

Gerard BoonB.A. (Hons), CeMAP, CeRER

Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.