What’s the real price of equity release?
In recent years, equity release has increased in popularity as a way for the over 55s to raise significant lump sums, and, anecdotally at least, the number of equity release deals are set to further increase this year, as a response to economic difficulties following COVID.
However, equity release is not a ‘one-size-fits-all’ product, it has its distinct pros and cons, depending on the scheme chosen. In this piece, we’ll try and cover some of the key factors to weigh up, if you’re considering equity release.
Who’s it for?
Equity release allows homeowners over 55, usually with property worth more than £70,000, to access the equity (i.e. the cash value minus any outstanding mortgage), that’s tied up in their home – without the fuss and costs of having to sell up and move out. You retain your status as a homeowner, releasing up to 50% of your home equity, and you can spend the money as you see fit. Depending on the scheme chosen, you may not need to make any payments until you pass away or move into permanent care.
How does it work?
Broadly speaking, there are two different types of equity release product: Home Reversion, which involves an outright sale of a percentage of your home at the same time as the money is released, and the much more commonly available lifetime mortgage. With lifetime mortgages, there are two main options:
- Roll-Up – As there are no monthly repayments to the lender. Instead, as the name implies, the interest is rolled up, added to the loan and the total is paid off when you go into long-term care or die, and the property is finally sold.
- Interest-Only – Monthly interest is charged by the lender and paid each month for life, and the main capital loan amount is then repaid by selling the property when you die, or if you go into long-term care.
Pros & cons?
Equity Release isn’t suitable for everyone. Generally speaking, it’s an irreversible lifetime decision, and there is so much more to equity release than a headline percentage rate. For a true price comparison, you need to look beyond the APR (compared to say, an unsecured loan) and consider the whole equity release package in the round, and how it could affect many areas of your lifestyle and finances, such as;
- Your disposable income
- The fact that you’ll be taking on debts against your home and ultimately your estate – affecting the amount you can leave to your loved ones in your will
- Your ability to downsize and move house
- Your eligibility for certain means-tested state benefits
- The potential for tension, if family members are not informed of your intentions
First, let’s look at your disposable income. For example, if you take on an Interest Only Lifetime Mortgage, you’ll have to meet monthly interest payments for life. You’ll need to be fully confident of meeting the payments and coping with the resulting loss of income.
Debts against your estate. As we touched on above, with Roll Up, the debt constantly increases, Some lenders do offer a maximum loan repayment of 10% per annum, however, the interest debt will continue to grow. If you opt for Interest-Only, there’s still the principal amount to pay off when you pass away. In either event, the amount you can leave in your will to your loved ones will be adversely affected.
Equity release may also negatively impact your ability to claim means-tested government benefits, such as Pension Credit and Council Tax reduction, among others.
You’ll need permission from your lender to move home and if you wish to exit the scheme, you will likely face an early repayment fee – as much as 25% in some cases.
Discussing equity release with your family. Nowadays, adult children often expect to inherit a significant sum from their parents, and if that’s about to change, they may need to be informed so that they can plan accordingly. Significant family tensions and even breakdowns in relationships can arise if expectations of the younger generation are dramatically altered without due notice.
As a safeguard against owing more than your estate can pay for, the Equity Release Council insists that its members abide by their “no negative equity pledge”. This means that even if the original loan and rolled-up interest exceed the value of the property, the lender can’t pursue your estate for any outstanding balance. But not all lenders offer this, so you’ll need to check.
Given all the above, the Financial Conduct Authority (FCA) requires equity release customers to seek financial advice. You’ll also need to engage a solicitor to review all the paperwork.
Where can I find out more?
This article is far from exhaustive, but as we’ve shown, if you’re thinking about equity release, your decision could have a major impact on your finances for the rest of your life, so you’ve got to get it right. You need to seek out expert advice.
That’s why at free2, we’ve introduced our Equity Release Advice Service to provide you with independent financial advice, from fully qualified experts who are regulated by the Financial Conduct Authority. No hassle or sales patter involved. Simply talk to an Independent Financial Adviser who will research the whole of the UK market to recommend the most suitable package for you. An advice fee of £595 is only payable if you complete an equity release loan. Your initial consultation however is free, and right up to completion, there’s no obligation on your part.
To see if the numbers might work for you, you could try our online calculator by clicking the button below. Arranging a free initial consultation meeting is easy.
Please note: This article was believed to be accurate at the time of writing and is intended to provide general information only to the reader – it does not constitute advice of any kind. Before making any decision about your savings, investments and your pension, you should consult an Independent Financial Adviser.
Free2 Limited (trading as free2) is an Appointed Representative of RS Consumer Finance Limited (RSCF) which is authorised and regulated by the Financial Conduct Authority (the FCA). free2 is a credit broker, not a lender, and will only offer loans from RSCF – an offer of credit is subject to status and affordability. Terms & Conditions apply.
Customers wishing to use the free2 Equity Release Advice Service, once registered, will be introduced to partners Money and Advice Planning (MAP). www.free2.com