2,538 plans for equity release were taken out in the South East in 2020 and the number of people using the money for holidays unsurprisingly dropped year on year from 34% to just 18%.
Perhaps coronavirus has impacted the way we’re all viewing money as Key reported from that same study that gifting and debt repayment accounted for almost three quarters of the value of equity released in quarter three of 2020.
Whether you’re planning to gift money to loved ones to help them onto the property ladder or use the money to repay debts of your own, good advice is vital to helping you find the right deal with an affordable interest rate.
With that in mind, this guide aims to highlight the pitfalls to be aware of when taking out equity release and lists the things to look out for when comparing contracts.
How does equity release work?
Equity release lets homeowners release money from their property, whether for a more comfortable retirement, to invest in a second property, to repay debt or even gift to children or grandchildren.
There are lots of variations of equity release products but the most popular are called lifetime mortgages or home reversion plans.
A lifetime mortgage might work for you if you’re happy to secure a loan against your property which will be cleared in the event that you go into care or pass away.
However some people prefer home reversion plans that allow them to sell a percentage of the property to release cash but still live in the home they love.
Which equity release option is the safest for me?
Everyone has their own financial plans for the future and that should affect the type of agreement that you apply for.
Comparing each option and then the subsequent lender options can take time - however, a variation of products can be a good thing as that provides more opportunities to be eligible for a good deal.
It can be more efficient to work with a mortgage broker as they’ll know which lenders are reputable and safe in the UK.
How does an equity release broker find me the right policy?
Equity release providers each have different terms and agreements, some of which may be more suitable or affordable for you, depending on your circumstances.
Our brokers get to know you so that they present you with policies that fit. They’ll ask you questions that might seem a little invasive - but your information is safe and only used for the purposes of finding the best lender.
If your broker thinks that equity release might not be the right option for you, they’ll let you know by suggesting an alternative and providing confidential advice.
Our brokers will discuss the pros and cons of each policy and extend their advice about alternatives such as downsizing to release cash or remortgaging, which can, in some circumstances, be cheaper.
How do I know if an equity release product is safe?
You can recognise whether a policy is legitimate by reading the terms and conditions which should state that the policy:
- Has a no negative equity guarantee
- Allows you to live in your home for the rest of your life
- Allows you to receive and draw on legal and financial advice
- Is regulated by the Financial Conduct Authority (FCA)
- Is also governed by the Equity Release Council (ERC)
Equity release has changed over the years with higher levels of safeguarding in place and strict codes of conduct that all lenders must follow.
Our brokers work with an abundance of equity release lenders across the UK and can discuss the protections that are in place for each agreement to help you make a decision about how to move forward.
Equity release safety tips:
- Use a company that's a member of the Equity Release Council. This trade body's members must promise a 'no negative equity' guarantee, so your estate will never owe more than your home is worth.
- Think about how it could affect your benefit entitlements because if you draw down on your property for cash, you may not be eligible for things like universal credit or pension credit.
- Always check this ahead of applying because your finances could be impacted and even leave you with a shortfall, especially if you have earmarked the payment for a specific fund i.e. to gift to a family member or consolidate a debt.
- Consider your future finances and how your income could change over the years. You may want to find a policy that’s flexible and allows you to increase your payout as you go.
Are equity release interest rates a con?
Signing an agreement for equity release is a decision that should be taken with care and great comparison. There are lots of interest rates for different products but usually, the more you borrow, the more you pay in interest over the course of your loan.
The age you are when you take out your policy can affect the amount of interest you pay. The lowest age you can apply for an equity release mortgage is 55 in the UK, though some policies have a 65 year minimum age requirement.
Younger applicants should consider that sooner they borrow, the more expensive it is, as the interest has longer to compound.
Depending on your circumstances, it may be a good idea to borrow smaller amounts as and when you need rather than borrow a large lump sum and pay more interest but this is something your broker can calculate for you.
Can I pay off the interest for an equity release loan?
Some policies allow borrowers to roll up their interest so that they pay nothing back until the end of the agreement but this can build up, become expensive and bite into inheritance.
Alternatively, you may want to find a policy that allows you to repay the interest over time but again, this will be your decision and you should never feel pressured into signing an agreement.
If you want to pay off interest over time, make sure it is affordable and that payments are manageable.
Some plans may also allow for ad-hoc voluntary payments which can help to minimise interest but it’s all about what works for you so explore your options and get some advice from an expert.
Can I release equity and leave inheritance for my children?
If you make the decision to draw down money from the equity you’ve built up in your property, you might want to consider how it could impact the inheritance it leaves for your family. Usually, though not always, equity release generally means there will be less for them to inherit.
Most equity release deals come with lots of different features to help you control how much you borrow and your lender should let you know how much your agreement would cost overall when it comes to settling.
You might decide that selling a proportion of your property works for you as this could leave you enough money to settle any interest and provide an inheritance to loved ones now. This is called a living inheritance. However you might also want to consider agreements which allow for an inheritance protection guarantee.
What is an inheritance protection guarantee and is it safe?
A common route of controlling what you leave behind is to ring fence, which essentially means that your agreement allows you to include protection for a fixed proportion of your properties’ value as inheritance.
For example, you might want to leave 50% of your properties’ value safeguarded for your children, while you drawdown against the other proportion of the properties’ value.
If you decide that you want an inheritance protection guarantee in your agreement, make sure that the lender is a member of the Equity Release Council, so that the deal comes with a ‘no negative equity guarantee’.
Calculating equity release and inheritance
Your own financial circumstances, the value of your property and the share of your property in which you may or may not decide to sell or borrow against, will all affect how much you can leave as inheritance.
It’s worth calculating how different variations of payouts could affect how much you could leave your loved ones, though keep in mind that the value of your property could also increase or decrease too, ultimately affecting how much you leave.
There are so many factors that could affect how much you leave as a benefaction but our brokers are happy to do the sums on your behalf to give you a clear view of the possibilities.
Call 02380 980304 or send us your questions about equity release safety.