There is a history of equity release companies being looked down on in the financial services sector, though one shouldn’t tar all equity release companies with the same brush. There are, undoubtedly, some that put profit before customers, but it is still possible to find reputable equity release companies, should you require this type of financing.
In this guide, we take a look at the different equity release options available to you and explain how they work. We also look at who they are best suited to, based on the circumstances of the applicant. Crucially, we examine the pros and cons of equity release and offer insight into identifying equity release companies that should be avoided.
What is equity release?
Equity release is a type of finance that enables homeowners to unlock the money that is tied up as equity in their property. For example, if your property is worth £300,000 and you have £75,000 of outstanding mortgage, you have equity to the sum of £225,000. If your mortgage is completely paid off, the equity you have in your property is its full value.
You will find many lenders who offer equity release to enable you to unlock that value without having to sell and move out.
You have the choice between receiving a single lump sum, getting regular payments over time or a combination of the two. The key benefit of equity release is that it gives you access to that equity without requiring you to immediately pay off the loan. Essentially, you pay it off via the sale of the house either when you move into permanent care or when you die.
Equity release options
Equity release comes in two different forms:
A lifetime mortgage is an equity release product where the mortgage holder remains the owner of the property. The lifetime mortgage capital and interest are paid back through the sale of the house when the owner moves into permanent care or dies.
This is a form of equity release where part or all of the property is sold to the lender. The recipient is permitted to continue living in the property and receives either a lump sum payment or regular payments over time. The lender will receive the proceeds of their share once the property is sold.
Who can apply for equity release?
Equity release is typically available only to those aged 55 or over. Some products are only offered to applicants aged 60/65+. You must own your property outright or have very little outstanding mortgage left to pay off. Many equity release providers will stipulate that the property must have a specific minimum value, such as £70,000.
The condition of the property may also be taken into account. Any property that is in need of extensive repairs or other significant work before it could be sold may not be accepted. It may be the case that the lender insists that repairs are carried out before they can agree to the equity release.
How does equity release work?
If you meet the criteria for an equity release loan and you have an application approved, the first step is that your property will be valued. This will determine the amount the lender is prepared to offer. Generally speaking, you will receive an offer of between 18-50% of the property’s overall value.
The older you are, the more a lender is likely to be prepared to offer. Once your application is approved and the loan amount confirmed, it is up to you to choose between receiving a single lump sum, taking regular payments over time or having a combination of the two.
Some people like the option of taking approximately half the money as a lump sum and taking the remainder as regular payments. Most lenders will offer flexibility with the arrangement to suit your preferences. Your preferred option will depend on how you wish to use the money. For example, some may choose a lump sum in order to buy a holiday home, while others may prefer a certain amount each year to pay for a holiday. Alternatively, regular payments may be a good way to help cover living expenses.
During the term of the loan, you are not required to make any monthly repayments. However, you can voluntarily make payments to help reduce the amount of interest owed when the property is sold. Whether you sell all or part of the property to the equity release provider, the capital and the interest are paid off using the profits from the sale of the property. This sale takes place when you move into permanent care or you die.
Learn more: How does Equity Release Work?
How do I set up equity release?
Equity release products are a less common occurrence than standard mortgages. As such, it is recommended that you work with an experienced broker like Think Plutus to find the most suitable lender. With the expert advice of a broker, you will be able to confirm your eligibility for equity release and find a lender whose offerings are a good fit for your circumstances.
What does it cost to set up equity release?
Just as with a standard mortgage, there are several costs involved in setting up equity release. These include:
- Valuation fees
- An arrangement fee
- Legal costs
- Financial advice fees
- A completion fee
The overall costs will vary depending on the lender and solicitor involved. Expect them to amount to around £3,000+. And, of course, you need to consider the cost that is the interest that will accrue over time.
One of the biggest disadvantages of this type of finance is that the overall set cost is not definitive. Interest is accrued right up until the point when the property is sold, and this only happens when you move into permanent care or die. In short, there is no set date for the loan period to end. This can result in the interest spiralling to a very large amount, as the interest rate is compounded. With standard loan types, the interest rate usually remains at the same amount for a set period, limiting the amount it can build up to.
Some people choose to pay off the interest to avoid it accumulating. This can help protect inheritance from being significantly diminished by that compounded interest.
Is equity release safe?
Equity release providers must be regulated by the Financial Conduct Authority (FCA), and the vast majority are members of the Equity Release Council (ERC). If you are considering this type of financial product, it is wise to only choose a lender that is a member of the ERC for added security. The advantage of FCA regulation is that anyone who is mis-sold an equity release product will be able to claim compensation.
Most lenders also include a no-negative equity guarantee. This protects you from owing more than the total sale price of the property when that time comes. In the past, once of the greatest concerns around equity release was the possibility of landing in a negative-equity situation.
Learn more in our guide: Is Equity Release Safe?
The benefits of equity release
There are many reasons to use an equity release product over other finance options. These include:
No mandatory monthly repayments
This is a key appeal of equity release. You will not have to commit to monthly repayments since the capital plus interest is paid off when the property is sold.
This means you can get a loan without the worry of having to keep up with monthly repayments on top of your other outgoings. Usually, taking out a large loan amount means committing to substantial monthly repayments. Equity release does not come with this financial commitment, making it an attractive option.
Equity release can give you a regular source of income that isn’t subject to tax. The money from equity release is completely tax-free, unlike leaving an inheritance. For some people, equity release is a good way to offer financial assistance to your children without having to wait until you pass away and without having to worry about inheritance tax.
However, it is strongly advised that you seek advice from a tax expert before making this choice. Some options will be subject to income tax, depending on the amount you are drawing down each year.
You can remain in your home
When considering the options available to you, one choice would be to sell the property and downsize in order to free up cash. However, you may want to remain in your own home as this might better suit your circumstances.
Moving home can be incredibly stressful, involving a lot of work to get yourself set up in a new place. There is the hassle of finding the right home to move into, paying all the associated fees and potentially having the purchase fall through if something unexpected comes up. There are many variables that all add up to this being a potentially arduous process.
Equity release enables you to remain in your home until you pass away, so you will never need to worry about the stress of moving home. You might love the location of your current home, with good friends and a nice community. Moving home could mean you lose those all-important connections.
Fixed interest rates
Equity release is usually offered with a fixed interest rate, generally somewhere in the range of 3-6%. With a standard mortgage, the interest rate usually changes with the Bank of England’s base rate. This means you cannot be certain of the amount of interest you will pay over the term of the mortgage.
Potential disadvantages of equity release
As with all financial products, there are potential disadvantages you need to be aware of.
They key things to look out for with equity release are:
Falling into a negative equity situation is a cause for concern, but most companies now offer a no-negative-equity guarantee. It is crucial that you check this with the lender before you proceed with them. Without that guarantee, if you are unfortunate enough to fall into negative equity, you (or your estate) could end up owing money after the property is sold.
Loss of means-tested benefits
If you are currently entitled to means-tested benefits, these could be lost if you take out equity release. This is due to the new income the equity release provides. For this reason, it is important to discuss your financial circumstances with an expert who can help you determine whether your means-tested benefits would be forfeit if you take out equity release.
Depending on the type of equity release payments you choose to receive, your liability for income tax could be affected. It is essential that you seek professional tax advice to ensure that you don’t find yourself owing more tax than expected. You could even find yourself not being aware of the tax implications at all. The draw-down amounts you choose could make you liable for income tax, so you should develop a strong understanding of how the different payment options will impact you from this perspective.
Loss of inheritance
Many people wish to leave the maximum possible inheritance for their family members. With equity release, this amount could be reduced because, when the property is sold, there will be various factors that impact on the inheritance. These include:
- The amount the property sells for
- The sum of the loan that was taken out
- How much interest has accumulated
Some equity release options allow you to ringfence a predetermined amount of money to leave as inheritance. This is worth considering if you have concerns about your loved ones losing out on some of their inheritance.
Finding a good lender and which equity release companies to avoid
Many equity release lenders are reputable and trustworthy, and will work towards their clients’ best interests. However, there are some equity release companies you need to avoid, that are more unscrupulous, who will attempt to profit from their clients’ lack of understanding about the other finance options available to them. For this reason, deciding on a lender is an important decision.
You need to consider the following:
Are they registered with the FCA and member of the ERC?
A good lender will be registered with the FCA and members of the ERC. This tells you that they are strictly regulated and you will have robust protections, as opposed to if you borrowed from a lender that is not. If you go with a lender that is not FCA-registered, you are at risk of being mis-sold a product without any legal right to compensation.
Lenders with ERC membership will offer:
- A no-negative-equity guarantee
- Interest rates that are capped or fixed
- Reasonable, competitive interest rates
- Sensible and clear early settlement fee structures
- The legal right to remain in your home for life
- The right to move home should you choose
One issue that sometimes happens with equity release is that the borrower finds themselves unable to move to another property. Even if you feel that you will not need to move home, it can be helpful to have that option available to you. Your circumstances may change down the line, and being tied to your property could end up being a disadvantage.
What are the costs?
Different lenders will have different costs with their products. However, a good lender should offer a detailed, transparent breakdown of the costs so that you can compare with alternative options. This is where the assistance of a broker can be valuable – they can compare the options available to you from the full market. They can also explain the calculations involved and help you find the most suitable product for your needs and circumstances.
What early repayment charges are involved?
You will find that the early repayment charges with some companies are very high. This is another important thing to consider before making a decision.
Do they offer a loan before learning your circumstances?
If a company offers a large loan without having gathered and assessed the information regarding your finances, this is a significant red flag. No reputable company should be making big offers before they have any idea about whether you can afford them.
Alternatives to taking out equity release
Before you choose equity release, you should be aware of the other options to consider. This will help you find the most suitable solution for your priorities and circumstances. The alternatives to equity release are:
Instead of releasing equity through a lifetime mortgage, you could consider remortgaging your property to unlock some of the equity. The disadvantage of this is that you will need to commit to monthly repayments, so if you are really trying to avoid this then you may find quite release a better fit.
However, if you have an income that can comfortably cover the repayments involved in a remortgage, this is a good option for keeping control of the inheritance you leave to your loved ones.
Read more here: Remortgage or Equity Release?
One common choice for retired people is to free up some money by selling their existing property and buying a smaller one with a lower price. For instance, you may be living in the family home after your children have moved out, so you have more space than you need. You could downsize from a 4-bed property to a 1/2-bed property and access the profits from the sale after buying the new property.
Another advantage of downsizing is that you reduce your maintenance and upkeep requirements like cleaning, gardening, painting, etc. There is also likely to be less wear and tear to the property. You may also want to consider what may happen to you in 10-15 years. Your mobility may decrease, making it more difficult to manage the upkeep of a larger home. Stairs may also be an issue – many retired people choose a bungalow so they don’t have to worry about climbing the stairs.
One significant disadvantage of downsizing is that it means you must go through the difficult process of moving. This includes looking for a new place, all the work involved in buying it and the fees associated with valuations, surveys, solicitors, etc. You might also love the location of your current property and prefer to remain in a familiar neighbourhood that feels like home.
If you own some valuable assets other than your home, selling them could be a viable option. It could be jewellery, artwork, vehicles or anything else that carries a substantial value. Some such items may have sentimental value to you, so you might need to weigh up whether letting go of them would be better than taking out equity release. Only you can decide which is the more suitable choice.
If you are a retired couple with two cars, you could sell one and share the remaining car to give yourself a lump sum plus save on running costs. Perhaps you have some shares you could sell. Any assets you own are worth considering as options to raise some capital – it may be a better option for you than taking on a new financial commitment.
Is equity release the right option for you?
In order to make the right decision for your situation, you need to identify your top priorities. Is it important to avoid taking on monthly repayments? Do you want the freedom to remain in your home as long as you choose to? Or is it essential to ensure your beneficiaries don’t lose out on their inheritance? Perhaps there is an alternative option to equity release that feels like a good fit.
Making a decision about whether to take out equity release is a decision that requires careful consideration. It can be extremely helpful to seek trustworthy, impartial advice from a reputable broker like Think Plutus.
Think Plutus is a whole-of-market mortgage broker with a transparent fee system and a commitment to finding the most suitable outcome for our clients. We have access to the full range of lenders and products in the UK, and we possess the knowledge and experience to assess your current financial position and identify the options that will be a good fit for you. This will help you find the most suitable product or solution for your needs.
For reliable, trustworthy advice on equity release, Think Plutus.