Equity Release Terms that Could Cost an Extra £20,000

To release equity, you have to own a home that is worth £70,000 or more, and you must be the right age for equity release, which is 55 years old.

The process involves speaking to an equity release adviser and then making an application to an equity release lender, detailing the type of equity release you are interested in (a lifetime mortgage or a home reversion).

Following on from this, if your application is successful, you will have a property valuation to determine the value of your home.

You will also be advised to find a solicitor who is experienced in equity release products to help guide you through the legal aspect of the scheme. In fact, you are required to seek legal advice at least once.

If you make it through the process, you will receive a loan that you can enjoy for the rest of your life without having to pay any of it back.

Depending on whether you have requested a home reversion or a lifetime mortgage, the equity release scheme will look different for you.

Please call our 24-Hour Helpline: 0330 058 1579

How is Equity Release Regulated to Ensure Customers are Not Being Scammed?

Previously, equity release was not as well-regulated as it is today. This meant that it was more likely that customers would be charged fees unexpectedly, and therefore homeowners could not trust this scheme to make them financially stable.

However, this is no longer the case. Equity release is regulated by the Financial Conduct Authority, as well as being controlled by the Equity Release Council (which is governed by the Financial Conduct Authority).

1. The Equity Release Council

The Equity Release Council is a body that regulates the equity release scheme in the UK. It ensures that homeowners and equity release lenders follow certain rules in order to keep equity release as safe as possible.

On the Equity Release Council website, you will be able to see a list of these regulations, as well as new regulations that have been added.

For example, you can see here that in April 2022, it was announced that all equity release customers have to have at least one face-to-face meeting with a solicitor before they enrol onto an equity release plan (1).

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2. The Financial Conduct Authority

The Financial Conduct Authority is not specific to equity release, unlike the Equity Release Council. However, it still works to ensure that equity release is carried out in a safe and secure manner.

This involves regulating both types of equity release: home reversions and lifetime mortgages.

One example of how the Financial Conduct Authority regulates equity release is that it checks that the advice that is being given to equity release customers is of high quality.

This involves confirming that professional equity release advisers are making sensible recommendations to homeowners (2).

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How Has Equity Release Changed For the Better in Recent Years?

Before we get into equity release terms that could cost an extra £20,000, we want to outline how equity release has changed for the better in recent years, meaning it is less likely that you will be caught out by little-known terms.

1. You can implement inheritance protection

In the past, some people chose not to take out equity as they did not want to leave their family with no money when they passed away. However, it is now very common for equity release arrangements to include inheritance protection.

This means that you can reserve a portion of your equity release funds for your family to ensure that they will inherit some of your money when you pass away. It goes without saying that your loan amount would be reduced, but this is worth it for many people.

2. You can repay your loan early with reduced penalties

Previously, it was not always possible to repay your equity loan early, or it would cost up to 25% of the loan amount. It is no longer as expensive to make early repayments.

There is often a sliding scale for early repayments, so the longer you wait before doing this, the more affordable it will be.

However, please remember that it is not always possible to repay the loan until you have been on the scheme for a certain length of time, such as five years.

3. You can downsize

Many modern equity release plans now include downsizing protection. This means that you are able to move home while you are on your equity release plan and you can transfer your plan to the new property.

They used to be a fee for doing this, but it is now possible to do this for free with certain equity release lenders. If you moved to a home with a lower value, you would be expected to repay some of the loan to make up for this.

4. There is a no negative equity guarantee

All equity release lenders who are associated with the ERC must provide a no-negative equity guarantee to their customers (3).

This means that no matter how much the homeowner’s property decreases in value, they will never have to pay back more money than they originally borrowed from the lender.

Families of equity-release consumers no longer need to worry about getting into debt over their loved ones’ decision to release equity.

Not only is it likely that their family member will have implemented inheritance protection, but with a no negative equity guarantee on top of this, the amount of money that the lender will require at the end of the scheme is entirely predictable.

Equity Release Terms that Could Cost an Extra £20,000 For Homeowners

Though equity release is as flexible as ever, it would be unrealistic for us to claim that there are no longer little-known terms that catch out some homeowners. Here are a few examples.

1. You may have to pay a fee to downsize

Though we have demonstrated that it is now much easier to downsize after taking out equity, you may have to pay a fee to do this with certain equity release lenders and certain equity release plans.

What’s more, there is more to downsizing protection than meets the eye. It is true that equity release lenders who are regulated by the ERC must allow you to move into a suitable alternative property at your request.

However, the keyword here is suitable. This means that you will not be allowed to move into any home, as it must be approved by the lender. For example, if you wanted to move into a retirement village, you may not be permitted to do this.

If this is non-negotiable for you, you could end up paying a large fee to be able to move into a home in a retirement village. It is likely that you would have to repay your loan, and depending on the lender, this may involve an early repayment fee.

2. There are penalties for repayment

As we have mentioned, there may be penalties if you want to repay your loan early. Many lenders allow you to repay a minimum amount, such as 10%, but you would be penalised for paying back more than this. Other lenders do not allow monthly repayments or lump sum repayments at all without charging you a hefty fee.

You can often predict the early repayment charge if the equity release lender charges a fixed rate. For instance, if your equity release provider’s early repayment charge is 20%, and your loan amount is £100,000, you would have to repay £20,000 to come out of the scheme early.

Other times, the lender will not have a fixed early repayment charge, as it will be based on whether gilts have increased or decreased since you borrowed the initial amount of money.

If your plan is based on a gilt-linked early repayment charge, it would be wise to seek financial advice about how much money you may owe, and whether it would be advisable to repay your loan early.

3. Early repayment charges may not be waived in exceptional circumstances

You may expect that you would not be charged an early repayment fee in exceptional circumstances, such as after the death of your partner.

However, some equity release lenders never waive the early repayment fee, regardless of the situation that you are in.

This means that if you want to exit equity release after your partner has passed away, but you do not have the financial means to do so, you may be stuck with the current plan that you are on.

Another potential consequence of this term is that you may decide to move in with a family member to receive long-term care, and therefore repay your loan, but your equity release provider may not allow you to do this.

Please keep in mind that some equity release lenders are willing to waive the early repayment charge after a significant event. They may allow you a period of three years well the penalty will not apply.

We advise you to make sure your equity release lender officer compassionate window like this before you make an application with them.

How Can I Avoid Equity Release Terms that Could Cost an Extra £20,000?

We know that it may be worrying to hear about so many different equity release terms that could cost you an extra £20,000.

However, we are being open about it as we want you to be aware of all of these terms before you release equity, to ensure you do not lose out on money unnecessarily.

There is one main suggestion we have for avoiding these equity release terms, and it works exceptionally well. This suggestion is to find an equity release lender that is regulated by both the Financial Conduct Authority and the ERC.

This means that the lender must follow all regulations of these two bodies, so they will not be able to prevent you from moving home or do anything else that unregulated lenders are allowed to do.

When you meet with your equity release adviser, it is essential that you raise these concerns with them, to ensure that you do not end up on a plan that you are not happy with.

For example, if you want downsizing protection and no early repayment fees, make this very clear to your adviser, and they will help you to find a plan that accommodates this.

Another top tip is to find a solicitor who is trained in equity release to help you with the legal implications of the scheme.

It is very easy to be caught out without a professional solicitor, so we recommend that you go further than the expectation of meeting with a solicitor once.

Instead, we encourage you to have frequent meetings with the solicitor as you make your way through the equity release application process.

If at any point in your equity release journey you are not happy with the behaviour of your lender, you can complain to the FCA, and you can trust that they will handle your complaint with professionalism.

Take Out Equity Today

We hope that you have not been deterred from releasing equity because of these terms that could cost you extra money.

By doing your research and being aware of these terms, you are already reducing the chances that you would be caught up in any traps.

If you stick to advisers and solicitors that are trained in equity release and are well-regulated, we are confident that you will be able to release equity in a safe and affordable way.

In terms of your next steps, we recommend reaching out to us and making the most of our free consultation over the phone. You can do this by calling us on 0330 058 1579.

If you are interested in how much money you could release on the equity release scheme, we have a free equity release calculator for you that determines your loan amount based on your age, property type, and property value.

We also have an article on the costs of releasing equity (including initial charges) so that you can compare this to the estimated loan amount that you will have after using the equity release calculator.

Please remember that equity release funds never need to be repaid while you are still alive. This means that even if you have been caught out by equity release terms, you do not have to worry about getting into irreversible debt as a result of this.

The worst thing that can happen is that you will owe more money to the equity release lender, so they will take more money from your house sale when you die or enter residential care.

However, if you have inheritance protection, this will not impact your family, as they will already have some funds reserved for them.

If you have not yet taken out equity, the best thing you can do to address the little-known terms is to do as much research as you can and to directly ask your equity release adviser about these terms.

Remember that equity release is only getting more flexible and more regulated each year, so this really is the best time to take out equity from your property. If you get started today, you are looking at 9-12 weeks from start to finish.

Please call our 24-Hour Helpline: 0330 058 1579

References

[1] Rules and Guidance https://www.equityreleasecouncil.com/about/standards/rules-and-guidance/

[2] FCA warns advisers it will look again at equity release https://www.ftadviser.com/mortgages/2022/04/07/fca-warns-advisers-it-will-look-again-at-equity-release/

[3] What is a no negative equity guarantee? https://www.equityreleasecouncil.com/what-is-equity-release/faq/what-is-a-no-negative-equity-guarantee/