The Pros & Cons of Equity Release

Arranging an equity release is one of the most impactful financial decisions you can make and, due to its nature, you will be making the choice later in life. Equity Release products vary greatly, and some can be truly advantageous whereas others may not be suitable for your circumstances.

Much of the consideration about how favourable an Equity Release product will be to you will depend on your personal circumstances. There are however major pitfalls and mistakes you can make, which mean even the best product for your situation could have lasting financial impact on you and your next of kin.

Let’s explore Equity Release in detail.

What is Equity Release?

The most common Equity Release product, which represents over 95% of the market, is a lifetime mortgage.  Lifetime mortgages are available to people over the age of 55 who own their property (or are largely mortgage free) and want to release the cash tied up in the equity. Equity Release can also be used for purchasing a property, but this is not as common.

Most Equity Release providers have other criteria such as a minimum property value of £75,000 and different credit check requirements.

When you take an Equity Release product on your existing property, you are essentially taking a new mortgage with funds paid directly to you. There is then an outstanding balance and interest payable to the lender.

A key difference between Equity Release and a traditional mortgage is that Equity Release products do not have mandatory monthly mortgage repayments. Instead, Equity Release products have an optional roll-up feature. This means that, if you do not make voluntary monthly payments to service the interest, the interest will compound. However, the interest rate is fixed for life with a lifetime mortgage. This means that borrowers know exactly how much the lifetime mortgage will compound by year on year during the term period. Therefore, there is total transparency from the start of the agreement regarding the costs in the long run.

The Types of Equity Release

The UK has a competitive and thriving Equity Release market with a diverse range of providers. There are two main types of Equity Release product these providers offer, a Lifetime Mortgage and a Home Reversion Plan.

If you are evaluating an Equity Release product you should be aware that there is no one size fits all product. For some a Home Reversion Plan will be the best option and others a Lifetime Mortgage.

Home Reversion Plans

Home Reversion Plans can be invaluable if you want to get your equity in a straightforward way and not worry about interest charges rolling up and being charged when the loan ends.

A Home Reversion Plan is akin to you selling a chunk of the equity you hold in your property to a Home Reversion Plan provider. They will make you an offer for the equity, and if you accept it, you will receive the funds.

When you die or require long-term care, the Home Reversion Plan Provider will arrange to sell your property and the difference in the amount they paid and the value the equity sells for will be their profit.

Although you are selling a portion of your equity up front, this is still a mortgage product because you will still be able to reside in the property and are therefore still borrowing the money.

While the initial proposition of a Home Reversion Plan may seem extremely good, you will find the value offered for your equity is lower than market value. The key is the difference between the amount offered to you and the realised sale price is a providers’ profit.

As such, Home Reversion Plans have often been derided for providing extremely poor value for money and it is not unheard of for providers to offer as little as 25% of the equity value.

Lifetime Mortgages

By far the most popular form of Equity Release in the UK, Lifetime Mortgage are a product much more similar to how you would expect a mortgage to work.

A Lifetime Mortgage will release the value of the equity at market value, and you will be charged interest over the time you have the product.

In this respect, people find Lifetime Mortgages preferable because they achieve good value on the equity they are releasing and retain 100% ownership of the property.

The lifetime mortgage will remain active on your property until you pass away or require long-term care. When the product ends, you will be presented with the option to settle the debt if you are still alive or if you have passed, your next of kin can repay the debt.

Alternatively, the property can be sold to repay the debt, which is the most common route for beneficiaries to take when clearing the debt.

Home Reversion Plans Vs Lifetime Mortgages as Equity Release

From the above product information there are clearly benefits and costs associated with Home Reversion Plans and Lifetime Mortgages.

Depending on your goals and attitude to risk, one product may be better than the other.

For example, if you are not interested in leaving an inheritance or you have no next of kin, it might not be overly concerning if your property is sold, and no one benefits after your death.

The lack of a next of kin should not be your ultimate deciding factor though. It is wholly possible your Equity Release product will end while you are still alive. If you require long-term care in the future, it will be a particularly vulnerable stage of your life to also be dealing with clearing a financial burden.

What Can Equity Release Be Used For?

Aside from illegal activity, equity release can be used for anything you choose and there are no restrictions on how you spend the money.

You can also tailor how your funds are released to you. For example, you might opt for one lumpsum payment or wish your total pot to be paid in regular instalments over time.

Some borrowers choose to have a combination of the above, taking a portion of money upfront and having the remainder paid in regular instalments. This can be beneficial if you want to spend some money immediately but also budget for future funds.

The Role of the Equity Release Council

If you are comparing Equity Release products you may have found the Equity Release Council pops up here and there.

The Equity Release Council is a voluntary body that providers can subscribe to. It sets standards for its members about how they conduct Equity Release products with the aim to be as transparent and fair to customers as possible.

Thus far, the Equity Release Council has been surprisingly successful in their reach and now oversee more than 90% of the Equity Release market. This means over 90% of Equity Release products meet the standards set by the council.

Membership to the council is not mandatory and it does cost a member money each year by way of a fee. Some providers also choose not to join the Equity Release Council because their products do not meet the guidelines required.

Unfortunately, this means that around 10% of the Equity Release market operates with relative impunity and has not committed to meeting the standards set out by the council.

What Are the Standards of the Equity Release Council?

There are five key standards the Equity Release Council sets for members.

While these standards are an excellent framework, they are subject to any contractual obligations you have with your provider. For example, if a provider does not deem an onwards property as similar to your current residence you may not be able to transfer your Equity Release product.

What Other Protections Do I Have with Equity Release?

Aside from protections afforded to customers using Equity Release Council approved products, there are also some basic protections afforded by the Financial Conduct Authority.

These basic protections are limited and mostly comprise of standard financial consumer protections.

You have your statutory rights to complain, first through the provider and if that fails to generate the outcome you desire, you can pass the complaint to the Financial Ombudsman Service.

Sometimes, due to the nature of Equity Release, the need to complain might occur after you have passed away and it can be very difficult for your next of kin to demonstrate unfairness when they were not a party to the contract.

Pros of Equity Release

The key advantage for Equity Release for borrowers is the ability to free up money that is tied up in the value of their property.

There is a wealth of reasons why this might be needed from helping your child buy a property while property prices are still affordable to booking the holiday of a lifetime.

You may even wish to make your current property mobility friendly so you can stay in it longer as you age.

The great aspect of Equity Release is unlike traditional mortgages there are no restrictions on how you spend the funds.

Here is a list with some of the Pros of Equity Release:

Cons of Equity Release

Equity Release can pose challenges for several reasons.

Typically, the cons associated with Equity Release are dependent on the type of Equity Release product you take. Namely, Home Reversion Plans offer poor value for money upfront, and Lifetime Mortgages can be expensive in the long run if you allow the interest to compound.

You can find both products disinherit your next of kin. Sometimes this can be a complete disinheritance if your property is your only asset and the proceeds from the property go fully to your Equity Release provider.

You should also be cautious when dealing with providers outside the remit of the Equity Release Council as they can offer substandard products. In some horror cases, people have been evicted from their property before they die or require long term care so a provider can recoup their costs.

Here is a list with some of the Cons of Equity Release:

Alternatives to Equity Release

As with any financial product, you should compare the wider market and ensure you are not ruling out a more appropriate product.

For example, the mortgage market has changed over the last two decades and now borrowers can take mortgages later in life and even borrow into retirement. There are also Retirement Interest Only mortgages you might wish to consider.

The benefit of Equity Release is you are not governed by the lender with how you spend the money, as long as it is for legal means, whereas other mortgage products stipulate the ways you can spend your money.

Seeking Equity Release Advice

Overwhelmingly, you should always seek expert advice when considering Equity Release.

A Whole of Market mortgage broker who can also arrange Equity Release products will give you full coverage of the mortgage market when they give you advice.

Due to regulation, you must seek Equity Release advice irrespective of if you approach a Whole of Market mortgage broker. The difference is you are affording yourself all options by seeking advice from a Whole of Market broker.

If you approach an Equity Release provider directly, you will not necessarily be presented with alternatives or be given the product that best matches your situation.

Speak to an Equity Release Expert

Equity Release need not be complicated and with expert advice you will find all the reassurance and information you need to make a decision.

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

Contact Boon Brokers to discuss your Equity Release goals and book your initial consultation today.