Is Equity Release Safe?
The simple answer to this question is yes, the majority of equity release products are completely safe due to the strict regulations that are in place.
Prior to stricter regulations being introduced in 2004, there were more risks involved in taking out equity release, due to the lack of protection.
Despite the industry being more regulated now, some people are still hesitant about taking out equity release due to the historical risky reputation of the product.
We also highlight the key considerations you should think about before you choose to apply for equity release.
Who safeguards Equity Release?
There are two key organisations responsible for safeguarding equity release:
The Financial Conduct Authority
The Financial Conduct Authority (FCA) regulates all equity release products, and all brokers and advisers must be authorised by the FCA to arrange equity release products and provide advice.
This means that lenders, brokers and advisers must follow the FCA’s strict codes of conduct and they can face penalties if they breach the rules.
The Equity Release Council
In addition to having the FCA as regulators, equity release is also safeguarded by the Equity Release Council (ERC).
The ERC is a trade body that equity release providers should be members of and members must comply with the ERC’s product standards.
These standards include:
- Providing a no negative equity guarantee. Going into negative equity used to be one of the biggest risks of equity release. Negative equity could occur when the house price drops to a lower value than the loan amount, so money is still owed to the lender once the house is sold. In this situation, beneficiaries could end up paying an additional amount on the loan to cover the difference.
- Freedom to transfer the product to another property. Most lenders now include the option to move home and transfer the equity release loan to the new property. Historically, transferring the loan was either not allowed or would have incurred a financial penalty to move the loan to a new property.
- Before taking out an equity release product, you must receive professional financial and legal advice.
- Interest rates must be fixed or variable on a lifetime mortgage, with a maximum limit applicable on variable rates.
- You are able to stay in your home for the rest of your life, or until you go into permanent residential care.
It is not a legal requirement for lenders to be members of the ERC, so before taking out a product, you should check the lender is a member of the ERC by looking for them on the ERC website.
People often worry about whether there is a catch involved with equity release but the regulations ensure that risks are kept to a minimum.
As long as you understand how the financial aspects of equity release works, regarding the accumulation of interest, the product can be the ideal financial solution for your needs.
The main negative element of equity release is the impact that it will have on leaving inheritance to family, as the loan will be paid off with the sale of the property upon your death.
If there is money remaining once the loan has been paid off, then it can be left to beneficiaries of the will.
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What to consider before choosing Equity Release
There are a few factors to consider before choosing equity release over other types of financial products. These include:
- Age Equity release is available for people aged over 55, with some lenders having a minimum age of 60.
- Property value Some lenders will only agree equity release on properties that are valued above a minimum amount.
- Property condition Properties that will require a lot of repairs or that could be difficult to sell may not be deemed as acceptable properties.
Types of Equity Release plans
There are two different types of equity release products to choose from:
With a lifetime mortgage, you still own the property and the lender provides you with a loan which can be arranged as a lump sum or a drawdown, or a combination of the two.
Under the terms of the mortgage, you are able to continue living in the property until you die and then the property is sold or refinanced by beneficiaries to repay the loan.
If you take out a home reversion scheme, you sell the property, or a percentage of it to a provider, and you are still able to live there until you die.
Home reversion is the less common option as the amount you receive will be considerably less than the market value of the property.
Inheritance / Family opinion
As well as making sure that equity release is the right option for your financial circumstances, you should also consider the impact it will have on your family.
If you want to be able to leave some inheritance to your family, equity release might not be the right financial solution.
It is a good idea to discuss your plans with your family so that they are aware of the equity release process and understand what will happen when you die.
Getting impartial advice
It is important to get impartial advice when you take out financial products and equity release is more complicated than most other products, so you should speak to a reputable broker or adviser before taking it out.
As the loan is taken out against your home, you should make sure you fully understand the impact that the loan will have on you and your family.
What to ask an Equity Release adviser?
Before your meeting with an adviser, it will be useful to have some pre-prepared questions to ask them, such as:
How much will equity release cost me?
Find out how much interest and overall costs there are for the product. The adviser should be able to give you a breakdown of the total costs.
Are there any early repayment charges?
Some lenders apply a large early repayment charges (ERC), so you should ask about any ERC, in case you want to repay the loan in the future.
Can you advise on both types of equity release?
Ask the adviser to talk through both types of equity release so that you understand which is the right one for you. They should explain the key differences between a lifetime mortgage and a home reversion scheme.
Are you a member of the ERC?
Confirm whether the adviser is a member of the Equity Release Council, to ensure that you have the protection that comes with that. You should also check on the ERC website that they are listed as members.
Can you provide me with alternatives to equity release if you believe it isn’t the best option for me?
Can I make ad-hoc voluntary payments?
Some equity release plans allow you to make payments on the loan, so that the total amount of interest is lower, and you can leave more money as inheritance.
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The downsides of Equity Release
Before you decide whether to take out equity release, you should evaluate all of the pros and cons to determine whether it is the right choice for you. The main drawbacks of equity release are:
Loss of inheritance for your family
When you take out equity release, you will not be able to leave as much inheritance to your family.
However, it is possible to arrange to ringfence a specific amount of inheritance that is guaranteed after the property is sold.
Compound interest can end up being a considerable amount
Equity release providers charge interest on the total amount of the loan and the longer the loan remains outstanding, the more interest will build up.
This means that owning the property for an extra ten years, for example, could end up costing a huge amount in compound interest.
Early repayment charges may apply
Many lenders have early repayment charges that are applicable if the loan is repaid within a certain period. If you think you might want to repay the loan at some point in the near future, you should discuss your options with your adviser to find a lender with no / minimal early repayment charges.
It may affect your benefits
If you receive means-tested benefits, borrowing a lump sum of money may affect your eligibility for some benefits. Therefore, you should ask your adviser how your benefits will be impacted before you take out an equity release product.
Due to the protection provided by both the FCA and the ERC, taking out equity release is much safer than it was in the past.
By seeking professional, impartial advice and asking all of the questions listed above, you should be able to find the right product for your needs.
If you would like to discuss whether equity release is the best option for your financial circumstances, book a free consultation with our equity release team at Boon Brokers.
Our brokers do not charge any client fees and they have Whole-of-Market access to lenders in the U.K.
Boon Brokers is also a member of the Equity Release Council.