Equity release companies have historically had a bad reputation in the financial services sector, although not all equity release companies should be judged in the same way. While there are some companies who may be more profit-focused than customer-focused, you are definitely still able to find reputable equity release companies, if this type of financing is what you are looking for.
In this article, we summarise the different types of equity release options, describe how they work and explain who they are most suitable for depending on the applicant’s specific circumstances. We also look into the advantages and disadvantages of equity release and provide guidance on how to identify the companies you need to avoid.
What is equity release?
Equity release is a financial product that enables homeowners to access money that comes from the equity in their property.
For example, if your property value is £250,000 and your outstanding mortgage amount is £50,000, you have £200,000 in equity.
Or, if you have paid off your mortgage and your property is worth £200,000, your equity in the property is the full value.
There are many lenders who will enable you to release equity in your property, so you can access the value in your property without the need to sell it and move out.
You are able to choose between a lump sum payment, regular payments or both, whichever option best suits your circumstances. The key benefit of choosing equity release compared to other types of financial solutions, is that it provides you with the opportunity to access your equity but you are not required to pay off the loan until you die or move into long-term care.
Types of equity release
There are two types of equity release:
The lifetime mortgage is a type of equity release where the property is still owned by the mortgage holder and the mortgage capital and interest is repaid either when the homeowner dies or goes into long-term care.
Typically, with a lifetime mortgage, you borrow up to 50% of the property value and are able to live in the property until you die, or the property is sold if you move into long-term care accommodation. This type of equity release is the most commonly used.
With this type of equity release, a percentage or the whole of the property is sold to the provider, and the person is able to continue living in the property. They are able to choose a lump sum payment, or regular payments and the provider receives the proceeds of their share when the property gets sold.
Who is equity release available to?
Equity release is usually only available to people who are aged 55 or over (some products are only available for aged 60/65 and over) and who own their home outright or have very little left to pay on their mortgage. Many equity release providers will require that the property has a minimum value such as £70,000.
The lender may also take into account the condition of the property, as properties that will require expensive repairs or other work before being sold might not be accepted. In some cases, the lender could specify that repairs must be completed before they agree to the equity release.
How does it work?
If you match the criteria for an equity release loan and your application is approved, you will have your property valued to determine how much the lender will be prepared to lend to you. Generally, you will be able to borrow between 18% and 50% of the total value of the property.
The older you are, the higher amount of loan the lender is likely to be prepared to lend to you. Once you have been approved and the loan sum is confirmed, you can decide whether you want to take the full amount in one lump sum, or if you would prefer to receive regular payments instead, or a combination of the two.
Some people choose to have around half of the money as a lump sum and then the remainder as regular payments and most lenders will be quite flexible with how you want to arrange the payments.
Your preferred payment method will depend on what you want to use the money for, some people want to buy a holiday home with a lump sum, for example, while others may want an amount each year to pay for a holiday, or regular payments to cover living expenses.
No monthly repayments will be required during the term of the loan, unless you choose to make payments to help reduce the amount of interest that is owed at the point that the property is sold.
Whether you sell the whole property to the lender, or a percentage of it, the capital, plus the interest accrued over the term will be paid using the profits of selling the property, which happens either when you die or move into long-term care accommodation.
How do I set up equity release?
Equity release products are not as common as standard mortgages, so the best option to find a lender will usually be to work with a broker who is experienced in arranging equity release products, such as Boon Brokers. The broker will be able to check your eligibility for an equity release product and find the most suitable lender for your circumstances.
How much does it cost? What do costs include?
Just like with a standard mortgage loan, there a number of different costs included in arranging equity release, including:
- Valuation fees
- Arrangement fee
- Legal fees
- Financial advice fees (with Boon Brokers, advice is free of charge)
- Completion fee
The costs will vary depending on the lender and solicitor that you use but the costs will amount to around £3,000 upwards. Then the other type of cost you need to consider is the interest that will be charged for the product.
One of the main disadvantages of this type of financial product is that there is no set overall cost. Interest continues to accumulate until the property is sold when you die or move into long-term care, which will not have a specific date. So, the interest costs could spiral to a very large amount, as the interest is compounded, as opposed to interest staying the same amount over a set period, as it does with a standard type of loan.
Some people choose to pay off interest, so that they can keep the interest down, to protect inheritance from being significantly reduced due to the compounded interest.
Are equity release schemes safe?
Equity release providers are regulated by the Financial Conduct Authority and most lenders are members of the Equity Release Council. If you are considering taking out equity release, you should check that the lender is a member of the Equity Release Council, to give you added security. The benefit of being regulated by the FCA is that if someone is mis-sold an equity release product, they would be able to claim compensation.
Most lenders will also provide a no-negative equity guarantee, which protects them from owing more than the total sale price of the property. Historically, being in a negative-equity situation was one of the main concerns for this type of financial product.
Advantages of equity release
There are many reasons that people opt for equity release over other types of financial products, including:
Equity release can provide you with a regular income that is tax-free. Unlike leaving inheritance, the money from equity release is tax-free. So, for some people, equity release is a way to provide their children with some financial help without waiting until they die and without the inheritance being taxed.
It is recommended that you seek tax advice before you agree on a product, as some options will incur income tax, depending on how much you are drawing down each year.
No monthly repayments (unless you want to)
One of the key reasons that people opt for equity release is that they will not have to commit to any monthly repayments, as the interest and capital is all paid later on, when the property is sold.
This option allows you to get a loan without worrying about whether you will be able to make the monthly repayments along with any other regular outgoings you have. Normally, to take out a large loan amount you would be required to pay substantial monthly repayments, so equity release avoids this significant financial commitment.
You can stay in your home
When you consider the different options that are available, you might consider selling your property and downsizing, to free up a cash sum. However, this option might not suit your situation, as you would ideally like to stay in your home.
Moving home can be a big upheaval and a stressful process, with lots of work involved to pack up your belongings and get moved into a new place. Then you also have the hassle of searching for a new property, paying for solicitors and valuations, as well as the possibility of a property purchase falling through if there is an issue with the property in the survey, or if another house sale in the chain falls through.
With equity release, you are able to stay in the property until you die, so you will never have to worry about moving home and trying to find another suitable property. Your current home might be in the location that you want to stay living in, with good neighbours and friends nearby and if you move, you could lose those connections.
Fixed interest rates
Equity release loans will usually have a fixed interest rate, which will typically be somewhere between 3% and 6%. With a standard mortgage loan, the rates can change in line with the Bank of England base rate, so you do not know what interest you will be paying over the full term of the mortgage.
As with the majority of financial product options, there are potential disadvantages to be aware of, in addition to the advantages. The key disadvantages you should take into consideration are:
Getting into the position of negative equity is a concern but most companies will provide a no-negative-equity guarantee, so it is important to make sure the lender you choose to go with does this. Without the guarantee, if you did fall into a position where there is negative equity, then you (or your estate) could owe money even after your property is sold.
Income tax implications
Depending on what type of equity release payment arrangement you choose, your income tax liability could be affected, so it is important to get professional tax advice to ensure you do not end up owing more tax than expected, or risk not being aware of the tax implications. The amount that you choose to draw down could result in income tax liability changes, so you should understand how the different amount options will impact you from a tax perspective.
Loss of means-tested benefits
Another financial implication to be aware of, is that people who are entitled to means-tested benefits could lose their benefits, due to the income they are receiving from the equity release. This is another reason that it is really important to discuss your personal finances with an expert who can advise whether means-tested benefits will be affected by taking out an equity release product.
Loss of Inheritance
The amount of inheritance to pass onto family members can be reduced, as when the property gets sold, there will be a number of factors that determine how much is left in inheritance, such as the property value, how much loan was taken out and the interest accumulated. Some equity release products give you the option to ringfence a certain amount of money as inheritance, which is worth considering if you are worried about your beneficiaries losing some of their inheritance.
Equity release companies to avoid and how to find a good lender
While many lenders are trustworthy and will work in line with their client’s best interests, there are also some less trustworthy people out there who will try and profit from other people’s lack of knowledge of the financial options available. Therefore, deciding on a lender is a very important decision and you should take the following into consideration:
Are they registered with FCA? Members of ERC?
The first step to finding a good lender is to ensure that they are registered with the FCA and that they are also a member of the Equity Release Council. This means that they are regulated and that you will be more protected than if you borrowed from a lender that is not. You are at risk of being mis-sold a product without any rights to compensation, if you do not go with a FCA registered lender.
Lenders who are members of the Equity Release Council will offer:
- A no negative equity guarantee.
- Capped or fixed interest rates.
- Sensible, competitive interest rates.
- Sensible early settlement fee structures.
- The right to remain in your property for life.
- The right to move to another property.
One of the issues that some people find when they take out an equity release product, is that they are unable to move to another property. Even if you do not think you will want to move property, it is important to have that option, as your circumstances may change over the term of the loan.
What are the costs?
The costs will vary between different lenders, but each lender should be able to provide you with a breakdown of the costs, so you can compare the different options. This is where using a broker can be really helpful, as they can compare the different options available on the market for you and explain the calculations to find the most suitable product for your circumstances.
Are there any early repayment charges? If so, how much?
Some companies have high early repayment charges, so this is another important consideration before taking out a product.
Offering loans before knowing your circumstances?
Another big red flag is if a company offers you a large loan sum, without having collated the information regarding your circumstances and specific financial situation. If they offer you a large sum before you have provided them with much information, you should definitely be wary of them.
Alternatives to equity release
Before opting for equity release, you should consider all of the different options that are available to you, to make sure that it is the best financial solution for your specific situation and your priorities. The other types of financial options available are:
Instead of taking out an equity release loan, you might want to consider remortgaging your property to release the equity in it. The downside to this is that the mortgage loan will need to be repaid as monthly payments, so if that is the main aspect that you are trying to avoid, equity release could be a more suitable option.
However, if you have an income that is able to cover the monthly repayments of a remortgage, this option will help to ensure that you know how much inheritance you will be able to leave to your beneficiaries.
If you have some valuable assets other than your home, it could be worth considering selling them. This could be jewellery, a vehicle, equipment or anything else of value. You might have sentimental items that you were reluctant to sell but when you evaluate whether it is a better option than an equity release loan, you may decide this is a more suitable choice.
If you are a retired couple with two cars, you could consider selling one of them and sharing a car to get a lump sum plus the savings in running costs. Maybe you have shares that you could sell, these are all types of assets that you could think about selling rather than committing to taking out any type of financial commitment.
One of the most common ways for retirement aged people to free up some money and reduce their outgoings, is to sell their existing property and buy a smaller property that costs less. For example, if you are living in the family property and your children have grown up and moved out, you probably do not need as big a house anymore.
You could downsize from a 3/4-bedroom property to a 1/2-bedroom property and have access to the profits made from the sale, minus the cost of the new property.
Downsizing also generally means you will have less maintenance and upkeep, such as gardening, cleaning, painting etc. and have less wear and tear to the property. As well as thinking about your position now, you need to consider what could happen in 10 or 15 years’ time. You might be fit and active now and the upkeep of the property is easily manageable but that might not be the case in the future. You might also need to consider factors such as whether a bungalow may be more suitable to live in when you are older and cannot manage the stairs.
One of the major disadvantages of downsizing is that you will need to go through the process of moving home, looking for a new property and all of the work involved in buying a property such as valuation, survey, solicitor searches etc. You may also be very happy with the location of your existing property and want to stay in the neighbourhood that you are familiar with.
Is equity release right for you?
The key to making the decision that is right for you, is to decide what your top priorities are. Do you want to avoid making monthly repayments and want to stay in your home for as long as you want to? Or do you want to make sure that your beneficiaries do not miss out on any possible inheritance? Also, do you have any alternative options to equity release that you would be happy with?
Deciding whether equity release is right for you is a choice that should be very carefully considered, taking trustworthy, impartial advice from a reliable broker such as Boon Brokers.
Boon Brokers are members of the Equity Release Council and, unlike most brokers, do not charge any client fees at any stage of the advice and arrangement process. Crucially, Boon Brokers also has whole-of-market access to lenders in the United Kingdom. We can help you to review your existing financial position and identify all of the available options, to find the most suitable product or solution.