Is Equity Release Safe?

Understand which Equity Release plan you have

There are two types of Equity Release schemes, Lifetime Mortgages and Home Reversion plans.  It’s important to make sure you understand the difference between Lifetime Mortgages and Home Reversion plans as they operate in different ways and have different risks and considerations.

With a Lifetime Mortgage (sometimes referred to as an “Equity Release Mortgage”), which is the most common type, you borrow against your home while retaining ownership. 

With a Home Reversion plan, you sell a portion or all of your property to the provider in exchange for a lump sum or regular payments, whilst continuing to live in the property as lifetime tenants. Understanding the features and implications of each type is essential to make an informed decision.

Almost all of the equity release plans taken out these days are the Lifetime Mortgage/Equity Release Mortgage type.  These tend to offer the most flexibility and generally have fewer risks and potential pitfalls.

Importance of professional advice

Taking out an Equity Release plan, whether a Home Reversionary Plan or Lifetime Mortgage, is a big decision and as such it’s important to get it right. Many make the wise choice to use an Equity Release Adviser or Financial Adviser who deals with Equity Release to help them with their decision.

When choosing which professional to help you with Equity Release it is first essential to make sure that they have the required qualifications and permissions to give advice on equity release in the UK.  Once you have established this then you can research local advisors and talk to a few to find the one that seems to be the best fit for you.  Equity Release can be quite complicated and a big decision so it’s important that you find someone who you feel comfortable communicating with and you find helps you understand the options you have and the consequences.

The FCA is the regulator for financial services in the UK, which includes regulation of Equity Release and Equity Release advisers. To advise on equity release in the UK you must have the appropriate qualifications and regulatory approval from the FCA.  It is a good idea to check any advisor you are considering working with on the FCA register. The FCA register is the definitive list of all financially regulated firms and individuals in the UK. If an advisor or firm does not appear on the register, their details are very different, or they do not appear to have the right authorisation then it is very unlikely that they are authorised to give advice and using them could be very risky.

The Equity Release Council is an industry body of which 90% of Equity Release advisers are members. It does not have regulatory powers in itself, but it is governed and regulated directly by the FCA. Equity Release Council Members must have agreed to abide by the Council rules and have signed up to their Statement of Principles.

If you decide to approach an Equity Release lender directly, you should make sure they are also regulated and authorised by the Financial Conduct Authority (FCA).

Ability to Move Home

Many are concerned about the risk of being stuck in their property if they take out an Equity Release plan, leaving them no option if they decide to move or downsize in the future.

If you have taken out a Home Reversion plan (the original type of Equity Release) then this could indeed be a problem as it is likely you have already sold your entire home or a significant portion to the home reversionary plan provider, and are living in the home as life tenants. This means that as soon as a property is sold the funds go to the home reversionary plan provider as they are the ultimate property owners.

However, with a Lifetime Mortgage you will have a lot more flexibility and options when it comes to selling the property.

As a Lifetime Mortgage is simply a loan secured against the property value, the Equity Release customer still retains ownership of their property at all times.  This means that if the property in question is sold then after the loan has been repaid any equity remaining can be used towards the purchase of a new property or for any other reason.  There will of course need to be enough equity remaining after the loan (and any fees and accrued interest) has been paid to afford the required property.

Many Lifetime Mortgages taken out today are also portable, which means you may be able to move your Lifetime Mortgage to a new property if you wanted to sell and move elsewhere.  There may be a fee to the lender for the transfer and likely legal costs associated with the purchase, but it is generally a good option if you need to move home.

However there are limitations that may restrict the type of property you can move the Lifetime Mortgage to and this must be considered.  Please read our article on this subject to find out more details if you’d like to find out more about moving home when you have an Equity Release plan.

Understand all charges, fees and Interest amounts

The process of taking out Equity Release often involves paying certain charges and fees, which will vary depending on the details of each situation.  There may be fixed fees due to the lender, for example upon taking out or redeeming the Equity Release plan.  There are likely to be Early Redemption fees payable for redeeming a Lifetime Mortgage within the first few years of taking out the Lifetime Mortgage.  There can also be fees for solicitors, surveys/valuations and possibly for the Equity Release adviser that you may use.

Whilst all of these fees should be easily and readily available, and should certainly be clearly explained by your Equity Release adviser, it’s important to keep track of them all and make sure you understand how much and when you may need to pay them.  The number and amount of fees and charges may affect your decision to take out Equity Release or which Equity Release product you choose.

In addition, there is also the possibility of increasing interest rates. Many equity release products offer a variable rate option, which means that your repayments can increase if the Bank of England base rate rises. This can result in a higher cost of borrowing, leaving you struggling to meet your repayments, and so it is important that you understand the risk.  Your Equity Reease adviser should be able to explain and quantify the risk, helping you to make the right choice on interest rates (including whether to go for a fixed or variable rate) and understand the amount of risk involved.

Negative equity

A common reason why people think that Equity Release is not safe is the risk of negative equity. Negative equity means that your mortgage debt is bigger than the value of the property. With a regular residential mortgage, this creates a problem as there will be more to pay the lender back than the property is worth if it is sold.  However almost all Lifetime Mortgages these days come with a ‘no negative equity guarantee’, which essentially caps the maximum mortgage at the value of the property, so that you will never owe more than the value of your property.

Having a Lifetime Mortgage with a no negative equity guarantee is a great way to remove the risk that your beneficiaries will have to pay additional funds to the equity release plan provider even after the home has been paid off.

This issue is not relevant in the case of a Home Reversionary plan as there is no debt taken out.

Impact on Inheritance

Equity release essentially means cashing in the equity in your home now rather than later, so you can enjoy the money today. This naturally means reducing the amount of equity in the property, which has essentially been exchanged for the money which is paid out.

If the money paid out from the Equity Release scheme is spent or given away, then this will naturally reduce the size of the estate.  If the decision is made to not make the monthly voluntary monthly payment on a lifetime mortgage then the interest will be added to the loan and the loan could significantly increase in size over the years. This means that the eventual amount of the loan could be significantly larger than the cash initially released.  It is possible for the house value to also increase over the years, essentially increasing the potential amount of equity, but this is an unpredictable increase which is unwise to rely on.

It is important to be fully aware of the long-term implications of how Equity Release impacts on an Estate and it is recommended that anybody who is expecting inheritance is made fully aware of what is being undertaken so that there are no surprises in the future.

Maintenance costs

It is also important to understand that while you are still living in your home, you are responsible for keeping the property in a good state of repair and any of the costs associated with the maintenance.  With a Lifetime Mortgage, the property must be maintained in order for you to remain eligible for the product.  This is the same as with a standard residential mortgage, as in both cases the property acts as the security for the loan, which helps reduce the cost of the loan and is the reason that mortgages are in general one of the cheapest ways of borrowing.

Final Thoughts on the risks of Equity Release

When it comes to safety, there are certain aspects to consider when choosing an Equity Release plan. Most importantly, you need to make sure that the Equity Release plan you choose meets your requirements, fits your own unique situation and that you understand the terms and conditions and all the costs and risks involved.

It’s a good idea to check what would happen in situations such as a Bank of England interest rate rise, changes in the value of your home and the potential need to downsize or go into long term care.

It is also important to be aware of any potential tax implications and in general how the Equity Release plan impacts your wider financial situation.

It may be worth considering using an Independent Financial Adviser who is qualified and regulated to give Equity Release Advice. This has the potential benefit of the advisor having a broader range of financial advice skills that may be useful in looking at equity release alongside your wider financial situation and future.

Leaf Financial Advisers can provide Equity Release and help guide you through the process, helping you make the right decision for you and your loved ones.  Please get in touch on 0173 823 823 or contact@leafifa.co.uk if you would like to have an obligation-free chat about Equity Release and if it is right for you.

Equity Release can be a great way of unlocking cash tied up in your property to use today.  However, it’s important to make sure it’s right for you and this includes being aware of all the potential risks and pitfalls with Equity Release.