How Can I Avoid Equity Release Risks?
Equity release can be the ideal solution for older homeowners who are looking to access some of the equity locked in their home without having to sell up or move. However, as with most things, equity release can have risks and isn’t suited to everyone.
It is always advisable that you take the proper time to do your research, gather information, look at all the options and seek professional, impartial advice to help you make an informed financial decision.
What Is Equity Release and How Does It Work?
Equity release refers to a broad range of products which allow individuals to access some of the equity locked in their home.
In the UK the two main options for equity release are:
Lifetime mortgages – The most common type of equity release, a lifetime mortgage allows you to borrow money secured against your home whilst still living in the property. The mortgage is then usually repaid from the sale of your home once you pass away or move into full time residential care.
Home reversion plans – With this plan you raise money by selling part of or all of your home whilst continuing to live in it, until such a time that you move into full time residential care or pass away.
What Are the Pros and Cons of Equity Release?
Both equity release and the advantages and disadvantages associated with it are often complicated and depend on factors such as the type of plan and the homeowners’ individual circumstances. Here is a brief outline of some of the pros and cons that can be experienced when taking out equity release;
Advantages of equity release
You can choose from either a tax-free lump sum or smaller, regular payments.
You can continue to live in your property until you die or move into full time residential care.
You or your beneficiaries could benefit from any rise in the value of the property.
Equity release is transferable so you are still able move home if you wish to as long as it is to a suitable alternative property.
If you opt for a lifetime mortgage then you can continue to live in and keep ownership of your home.
Potential disadvantages
With equity release, the value of your estate will be reduced which means that the amount left behind to the named beneficiaries in your will would be lower.
If you choose a home reversion plan, then the reversion company will own either all or a part-share of your home.
If you receive means tested benefits then it’s important to check beforehand as the extra money from equity release could reduce your entitlement now or in the future.
For those who receive care at home that is funded fully or partially by the local council then they could start charging you or ask you to pay more.
Is Equity Release Safe?
Equity release is overseen by the Equity Release Council (ERC) whose safeguards provide protection for homeowners in ways such as;
Ensuring that companies and advisers are registered and regulated by the Financial Conduct Authority (FCA), so they have access to the Financial Services Compensation Scheme if they ever need it.
The Financial Conduct Authority (FCA) does not make equity release safe however the FCA has enforcement powers including the right to impose a penalty on a regulated company or financial adviser and make this public. It also has the power to carry out investigations and take disciplinary action against a firm and also if required proceed with criminal proceedings.
Making sure that interest rates are fixed or when variable there is an upper limit or cap which is fixed for the lifetime of the loan.
Guaranteeing that you are able to stay in the property for life or until you move into full time residential care.
Making certain that homeowners have the right to move to another property as long as the provider is happy that it is suitable.
The Council also provides strict rules and guidance on the equity release sales process and stipulates that you must receive professional financial advice and independent legal advice before you take out the loan to ensure that you understand exactly how equity release works.
How Can I Mitigate The Risks?
The Equity Release Council already goes a long way to ensuring that those looking to take out equity release are protected with certain guarantees, but there are steps you can take yourself to help reduce equity release risks;
Choose a product from a company that is a member of the Equity Release Council.
If you opt for a lifetime mortgage then make sure it comes with a ‘no negative equity’ guarantee. This means that once the property is sold and any solicitors and agents fees have been paid, if the remaining amount is not enough to cover the outstanding loan, then neither you nor your estate will be liable to pay any more.
Take the proper time to do your research, seek out accurate information and impartial, professional advice from equity release advisers in order to help you make a smart, informed decision.
Consider other alternatives if you are advised that equity release might not be the right fit for your circumstances.
Compare the whole of the market or ensure that you deal with an equity release specialist who does.
Consider options such as inheritance protection, early repayment and interest repayments.
