You’ll probably agree when I say…
If you’re a homeowner, you’re a lucky retiree nowadays. Why? Well, because property prices have increased dramatically, and being a homeowner gives you excellent financing options.
Think about it:
As equity release is becoming more and more popular, you can now unlock any equity or money that’s tied up in your home or property, but you don’t have to sell it or downsize to a smaller, cheaper house.
And astoundingly, many people are currently taking out equity release plans to save up for their retirement via equity release plans. Roughly every 12 minutes, someone takes out an equity release plan in the UK.
Get that Deserved Retirement
Life expectancy isn’t what it used to be. Now, because people are more focused on healthy living, exercising, and clean diets, life expectancy has risen to 81 years, where it used to be 74! This is also thanks to medicine advancing at an incredible pace. This means that you’re probably going to live very long and have a long retirement!
Let me tell you…
Retirement is very exciting for most people, but it’s also potentially one of the most challenging chapters of a person’s life when it comes to finances. Even more so when your pension income can’t cover all your needs, and there’s no way for you to make up for the lack.
By releasing the equity that’s locked up in your property, you can receive a tax-free lump sum or smaller cash payments to boost your pension. So, when you take out an equity release plan, you can keep your current lifestyle, and pay for your ultimate dream holiday! It’s so easy because there aren’t any limitations on how you should spend the money you release. Some people even start a small business or help their family with a monetary gift.
Best of all.
The most popular type of equity release is a lifetime mortgage. Why is it so great? It doesn’t need to be repaid until you pass away or go into permanent care. But, like everything in life, it comes with some limitations and risks, making it vital to know what are the pitfalls of equity release.
Thus, bringing up the question, is equity release a good idea?
3 Equity Release Benefits
Equity release plans are becoming the most popular way to release the money tied up in your home. You can get all the perks of that equity, yet maintain ownership of your property. There are two very flexible ways to do so:
- You can choose a life which works by taking a secured property-based loan.
- You can choose a home reversionplan which works by selling a portion of your property to an equity release company.
These plans give you the financial freedom to take cash from the equity in your home and spend it any way you like.
It gets better!
A home reversion provider sometimes allows you to ring-fence some value of your home. That way, you can be sure that your heirs will get a portion when you’ve passed on. You can repay by making payments towards the loan interest or letting the monthly interest roll up.
The loan plus accrued interest are repaid when you pass away or when you move into permanent care, only if the property is your primary home throughout the plan. You also need to abide by your provider’s terms and conditions.
Nowadays, interest rates are astonishingly low, some as low as 2.25%! And they’re usually fixed for the period of the loan. For the most part, providers don’t require early repayments, but the interest will “roll up” (meaning any unpaid monthly interest get added to the loan total). So, your loan can increase quite rapidly over some time.
But, that’s not all.
Your health condition is also taken into consideration when you’re taking out an equity release plan. You may be eligible for an enhanced lifetime mortgage if your health condition is wrong or you have an unhealthy smoking habit, for example.
Equity release plans also have a “no negative equity guarantee”. Meaning, once your property is sold, all agent and solicitor fees have been paid, even when the remaining money is not enough to repay the loan. This is according to the Equity Release Council Standard1.
Are you still wondering if equity release is a good idea?
There are so many benefits to taking out equity release, so it’s an ideal plan for you if you’re older than 55, require some cash, and own a home. These benefits include:
1. You Can Still Live in Your Home
The American Psychological Association (APA2) found that selling your home and moving house can be emotionally and physically exhausting. Therefore, it’s great that you don’t have to go through the ordeal of packing up and moving to a new and unfamiliar place with equity release.
You might want some extra room in your home to have drinks and barbecue Sundays. Or, when the grandkids visit for the holidays, they’ll need a spare room, so then downsizing won’t be the best solution to get some more cash.
And that’s one side of the story.
Moving also costs money: there are solicitors’ fees, removal charges, stamp duty fees, and the emotional price of packing up and leaving your comfortable home where you’ve spent most of your life with your children and where you’ve made unforgettable memories with your friends and family.
By releasing equity, you can keep your independence and keep living in your family home until you pass away or need permanent care.
That being said…
You’re allowed to move to another house if it’s an acceptable house according to your plan provider. Just a side note: if you have heirs, they’ll most likely receive a smaller inheritance after equity release.
2. You Get to Live Luxuriously
Equity release plans allow you the freedom to do whatever you want with your money, unlike other financial plans or products that tell you how to spend your money.
If you have a home reversion lifetime mortgage plan, you’ll have the financial freedom to do all the things you’ve wanted to do for so long. Whether that’s a holiday to foreign countries and exotic locations, purchasing a vintage car, or even doing home renovations, you’ll be able to once you release equity from your home.
You’ll still get the right to live in your house for life or until you need permanent care. You can move to a new home if you want to move to a new home if it’s of equal value and meets your provider’s requirements.
But wait, there are other ways to spend your money.
Equity release allows you to gift an inheritance to your kids now, rather than in the future when you’ve passed on. You can see them bringing up their kids without financial troubles, for example. Or you could donate some money to a charity and see how they grow from it while you’re still alive to enjoy it.
Let me tell you…
Your state benefits entitlement can be affected by equity release withdrawals. Therefore, weigh the pros and cons to determine how it’ll affect your future and financial situation in later life.
3. Protect Your Inheritance & Your Heirs
Equity release has put some safeguards in place to protect your inheritance and family’s financial wellbeing. The no-negative equity guarantee makes sure that your equity release plan follows the Safe Home Income Plan (SHIP) rules.
Without this, you or your heirs will have to pay the difference between the sold property amount and the rest of your loan. The no-negative-equity guarantee protects your heirs, so they don’t inherit any debt that’s more than the property market value when you pass on or move into permanent care.
These are some of the benefits of taking out an equity release product that will ensure it’s one of the best decisions you’ll ever make!
If you’re still uncertain, that’ll help.
Taking out equity can be a stressful decision that shouldn’t be made without seeking advice from an objective financial adviser. However, because the industry has stipulated rules and a regulated and monitored industry, you don’t have to worry about it.
So, here’s the deal:
When you’re considering equity release, you need to think about interest rates and their effect on your loan amount. Unlike a standard mortgage loan, the interest period of an equity release mortgage loan is open-ended.
The loan amount accrues interest, which if you don’t repay it, it’ll “rolls up” over a period. This type of equity release lifetime mortgage is an interest roll-up mortgage. The accrued interest is compounding interest, and it means that you end up paying interest on the interest.
So, what’re you waiting for?
The Pros & Cons of Equity Release
The Seven Advantages
Equity release strategies controlled by the FCA 1offers a way for you to get access to the equity tied up in your home.
You can take this tax-free cash in a single lump sum or in regular repayments and use it as needed. Admit it; it can’t get much better than this!
#1. Tax-Free and Fancy-Free
You’ll have tax-exempt money to spend any way you like, and you won’t need to pay a charge on the amount that you release.
Individuals release equity for various reasons.
It can be to pay off a home loan or obligations, make home improvements, increase retirement income, and live a more stress-free life, support family, and pay for something such as a vacation. Wouldn’t it be great to take care of any of these effortlessly?
#2. A Fulfilling Retirement in the Home You Love
You’ll be able to remain in your own home even after you’ve released equity.
You can view equity release as another option to improve your quality of life but there are alternatives. An example of this could be where you sell your house to relocate to a more affordable one and use the difference as you feel appropriate.
With equity release, there’s also no compelling reason to move.
Listen to this…
Many choose to use a portion of the cash they release to make upgrades to their house. Suppose they use a portion of the cash for this.
In this case, it could permit you to make the most of your retirement without agonizing over fixing things around the house or making adjustments as you age.
It’s safe to say that everyone dreams of retiring in the house they love. It means you won’t have to face the pressures and costs involved in moving.
#3. Debt On the Low and Smiles on the Rise
You won’t need to make any month-to-month repayments unless you want to.
There will be no need for such repayments, or any repayment until you pass away or move into residential care. It implies that your month-to-month expenses won’t go up, which will help with your everyday budgeting.
Some individuals prefer making payments towards interest to keep their debt as low as possible. If this sounds like you, you want to look at an interest-only lifetime mortgage.
#4. No Caught-Out or Unexpected Fees
You’ll never have to pay more than the value of your home. This is known as a ‘no negative equity guarantee.
Are you wondering what this means? It means that no one will place your outstanding loan amount into your family’s hands once you’re gone.
#5. A Dip Into the Low-Interest Rate Pool
Having access to low-interest rates is another benefit, and you’ll be happy to know that these have dipped down to the lowest they’ve been in five years.
#6. Permanent Cash in Your Back-Pocket
The next advantage is that the money is there for you when you require it. Wouldn’t it be great if this was the case for you?
It means that you’ll receive a regular income as per the limit set by your plan provider. You also won’t have to pay interest until you decide to access it.
#7. Avoid Inheritance Tax and Make Your Family Happy
Paying inheritance tax could be avoided, so you can spoil your family with a cash gift without having to worry about tax eating it up. Just imagine that!
When it comes to inheritance tax, the rules can be quite complicated, so to save yourself from uncertainty, seek the advice of an expert.
The Six Disadvantages
As with anything that comes with advantages, there are disadvantages too.
Since it’s a loan secured against the value of your home, the repayment of any outstanding money will be made when you pass or move into permanent care.
Equity release will also lessen the inheritance you leave behind.
#1. Debt Can Run Away From You, But You Can’t Run Away From It
Your debt will continue to increase due to compound interest, which is when interest is added to the outstanding balance and interest charged thereon. Any money owed could increase substantially over the years – because of a lifetime mortgage not needing to be repaid until you pass or go into permanent care.
There’s a solution to this. You can reduce your debt by injecting money into your loan at a gradual rate, with an interest-only lifetime mortgage.
#2. The Negative Effect on Current and Future Benefits
Equity release could influence your current and future qualification for means-tested state benefits. These benefits can include pension credit, investment funds credit, or council tax benefit.
Regardless of whether or not you’re qualified for these advantages currently, contemplate whether you may require them later on. It’s also crucial to speak to a financial adviser about any possible limitations.
#3. A Lifelong Commitment That Can be Costly
You might face early exit fees due to a lifetime mortgage being a lifelong commitment.
If you opt for paying it off early, you might have to pay a penalty fee, which is why it’s essential to see what charges may apply, even if you don’t think they’ll apply to you.
#4. Your Home Inheritance in Someone Else’s Hands
You won’t necessarily be able to leave your house as an inheritance because your home will be sold to repay the scheme provider once you pass away or move out.
Any money that remains will go to your estate to leave as an inheritance. You can also choose to ring-fence a percentage of your home’s value if securing an inheritance for your loved ones is important to you.
#5. Extra Advice Comes With Extra Fees
You have to pay arrangement fees and pay for the mandatory advice you need to obtain.
#6. No More Loans Allowed
Once you’ve signed for an equity release, you can’t take out any other loans using your home as security.
If you have any leftover equity in your property, some providers may allow you to take out another loan in the future.
How Safe Is Equity Release Really?
Although equity release is very popular as a financial product, there are still a few questions and uncertainties around it. You might be asking yourself: how safe is equity release really?
Here are 7 reasons why equity release is better than it used to be in the past, and why it could be the best thing in your life:
1. The FCA
FCA acts as an official watchdog for financial products. They oversee and monitor the industry in the UK specifically.
What does it mean for you?
They regulate financial product lenders, advisers, and brokers, as well as equity release products. They require that lenders/providers need to be registered and ensures that these providers stay within the rules stipulated in the code of conduct.
Thanks to the FCA1, you can now have sufficient and needed protections to look after your best interests. Equity release is especially safe nowadays. The FCA also provides you with a way to take legal action against the providers who aren’t meeting the requirements stipulated by them.
2. The ERC
The ERC, or the Equity Release Council, governs equity release specifically. They require their members to follow their strict code of conduct rules and regulations. So, you can rest assured that your money is protected, as well as your rights.
Some of their protection services are:
- Every consumer must get financial as well as legal advice to make sure that equity release is the best way to go.
- All plans need to have a ‘no negative equity guarantee’. This ensures that your family won’t have need to pay back outstanding money (if your house sells for less than your loan value).
- You are allowed to live in your house your whole life if you want to.
- If you want to take out equity, one or two face-to-face meetings are required by the ERC2. These meetings need to include an independent solicitor who will also handle the legal aspects of the equity release process.
If you want to take out an equity release, make sure that your provider is registered with the Equity Release Council. Then you’ll know that your finances are safe and secure under the ERC’s protective services.
3. Your Family Won’t Be Buried In Debt
If you’re thinking about taking out a lifetime mortgage and it’s with an approved equity release lender, you will most definitely need the no negative equity guarantee to safeguard your family.
The ‘no negative guarantee’ was created solely for protecting you. Simply put, it helps you so that you never need to pay more than your property value. Better yet, your family won’t have to settle your debt once you’re gone.
Let me tell you something:
If the value of your property decreases significantly and you get less selling it, the equity release provider is required to write that off when you die.
4. You Can Live In Your House
Some people don’t know anything about equity release and its pros and cons. Well, if you’re one of those people, you should know that you are allowed to remain in your home for the rest of your life, even after you’ve released equity from your property.
When it comes to lifetime mortgages, you get to stay in your house. And you don’t even have to sell part of your house to get the money you need. You’ll be borrowing it against equity.
For this reason, you can continue living in your house (of which you’re the owner) for as long as you want to.
Best of all…
As the ERC’s rules state, when you want to release equity from your house and it’s a joint partnership, you’ll still be the sole owner. That is, until both parties die, or go into long-term care.
5. You Can Move To A New House
Unlike popular belief, taking out equity from your home doesn’t tie you up to that home for the rest of your life. If you want to move into a new house, you absolutely can.
The ERC gives you the right to take your equity release plan to your new home, as long as you’re moving to a satisfactory home that meets your providers rules. However, you’ll need to move to a cheaper home if you don’t want to pay the difference. It all depends on your provider though.
6. You Must Consult an Advisor
The ERC requires that you ask a professional for advice before you can apply for an equity release plan.
Furthermore, this professional adviser should be a qualified equity release consultant. The Equity Release Council keeps a directory so that you can confirm they’re qualified.
7. Your Estate May Retain Inheritance
As you know, equity release loans need to be repaid when your house gets sold by your provider, plus interest that it’s accrued. You should also know that this will decrease your inheritance.
If there’s money left after the loan has been repaid, your heirs (according to your will) can receive that.
If you want a guaranteed inheritance for your loved ones, your provider should have a specific plan available to ring-fence an amount of your property’s value. Simply let your adviser know so that they can provide you with an equity release plan that’s suitable for your specific needs.
You Will Be Surprised At How Flexible It Is
As you know, traditional mortgages aren’t so flexible. However, equity release schemes give you peace of mind. Most of the time, equity release schemes don’t ask you to make any repayments. Therefore, you can’t get into arrears and your property can’t be repossessed. Now:
Are equity release schemes safe?
Because the equity release market is growing continually, and more equity release products are busy entering the market daily, most lenders offer greater choices.
These products include:
- Fixed-rate schemes for life, so you’ll always know the amount to pay back at the end of your scheme.
- Fixed early repayment charges, so you‘ll know the exact amount of money payable for penalty, if you want to make early repayments to your plan.
- Plans that allow you to pay ad hoc voluntary. These, in the long run, will help you to manage your future finances.
- Downsizing protection features that ensure you can repay your equity release plan, with no penalty charges. However, only if you move into a new home after five years from the beginning of your plan.
If you’re still unsure about the security of equity release, have a look at how far it’s come and how much it’s improved over the years.
Since 2015, equity release interest rates have decreased immensely – and that low-interest rate can be constant for life.
Best of all:
How much interest you pay when your plan comes to an end will depend on the length and type of your scheme or equity release plan. It’s vital that you remember – equity release plans end when you pass away or move into old-age care.
When it comes to a limited lifetime mortgage plan, and you don’t make monthly settlements, your interests will increase quickly. All interest you owe will be added to your overall loan amount annually. From that time onwards, it’ll grow.
What does this mean for you?
You absolutely need to remember to choose an equity release plan that has a “no negative equity²” promise. Why? Well, it ensures that you and your family don’t owe more than the value of your property.
5 Myths About Equity Release Debunked
Myth 1: Your Family Could Owe MORE Than Your Property IS WORTH
If you select an equity release plan from a provider approved by the Equity Release Council1; you’ll never owe more than the worth of your house after its sale. This assurance is called a no-negative-equity guarantee.
What does this mean for you?
The no-negative equity guarantee means that if your home sells for less than the mortgage value; the difference will be written off. Usually, any funds left over after the mortgage has been settled will be paid to the beneficiaries in your will.
Myth 2: It’s Costly And You Will Have to Pay Monthly Instalments
A lifetime mortgage does not come with monthly payments unless you chose this specific type of plan. Some plans allow for optional payments of 10% or less of the mortgage balance annually, penalty-free.
You might be asking yourself:
What if I choose to structure my repayments differently? With this option, interest on the borrowed amount may add up over the years. This interest will have to be paid upon your death or when you move into permanent long-term care. If your equity release product was taken as a couple, it would carry on until the last person no longer lives in your home.
Myth 3: You Will No Longer Own Your Property
An equity release product is not the same as selling your home. Instead, you’re borrowing against your home. This means that you’ll maintain ownership of your property.
You, like many people, could be unsure how a lifetime mortgage differs from a conventional mortgage.
In simple terms:
A lifetime mortgage is, in essence, a long-term loan, which you repay with your property. A key difference is that it has no fixed end date.
What this means is that the mortgage will last for the length of time you require it. A lifetime mortgage has the added benefit of being well suited to older homeowners, as many product options are specifically designed for those in their 60s.
Myth 4: A Mortgage Prevents You from Releasing Equity on Your House
If you have a mortgage on your house, you’ll still be able to release equity from your home. An often-cited reason for taking out a lifetime mortgage is to leverage the value of your home to repay an existing mortgage.
What does this mean for you?
A lifetime mortgage allows the customer to receive cash in return and for the equivalent of the first charge on their home. This cash can be used, in the same legal transaction, to repay an existing mortgage. The lifetime mortgage also gives them the benefit of a life term with no concerns over repayment.
Those who want to make repayments regularly or monthly can choose a plan that suits them, and this can be deducted via direct debit order. Should the customer be unable to pay, or miss three installments, the mortgage will automatically switch to rolled-up interest instead of defaulting.
Myth 5: Equity Release Will Affect Your Family’s Inheritance
In the last few years, lifetime mortgages have become more flexible, with numerous products and plans available. Some options will let you keep a portion of your equity aside to leave to your family as an inheritance.
Another option is:
If you would prefer, your beneficiaries could receive financial support before your death as equity release can be used to provide them with an early bequest. However, this option will leave you with less equity for you to use later and may decrease your estate’s value.
Did you know?
Financial gifts and loans are usually given to the younger generation – between 25 and 44 years old – according to data from the Office for National Statistics. In the last two years, around 10% of those in the age group were gifted or loaned over £500.
The older generation often wants what they had in their youth for their children and grandchildren, and this could explain the increase in equity release over the last year. In the third quarter of last year, homeowners released around £11m daily from their properties. A large proportion of this will likely go to assist younger family members in purchasing property or funding schooling and living expenses.
Is Equity Release A Good or Bad Idea?
Yes, it can be a brilliant financial decision – if you’re looking to get tax-free money without monthly repayments nagging on you. However, it might not be the best choice if you want to give your heirs a significant inheritance to your family. Equity release decreases your estate.
What Are the Advantages to Equity Release?
The advantages are tax-exempt money, staying in your own home, having no month-to-month reimbursements, and paying more than your house value.
You’ll also have access to low-interest rates, money when you need it, and avoidance of paying inheritance tax.
What Are the Disadvantages to Equity Release?
The disadvantages are increasing debt, benefits affected, and early exit fees.
The house also won’t be left as an inheritance, you will need to pay set-up fees, and you won’t be able to take out another loan.
Is Equity Release Safe?
Yes, as there are specialist advisers, solicitors, and other professionals and experts involved during the process.
So, we’ve covered the ins and outs of equity release, its pros and cons and how it works. It’s a great and easy way to get some extra cash flowing into your bank account, with many perks that come along with it!
It’s also much more regulated than it used to be in the past, so there’s nothing to be worried about how safe is equity release! Contact your financial adviser today and go ahead into financial bliss!