By Tom Philips at January 26, 2023

Which Equity Release Companies Should You AVOID?

An equity release company is a company that offers an equity loan to customers. This means customers can take out money from their property and receive an equity loan that they can use to fund their retirement.

Equity release companies do not impose rules on what customers can spend their loan on, so they can decide between home improvements, second homes, monthly top-ups to their income, holidays, and anything else that could improve their retirement.

Different equity release companies have different lending criteria, so some will require customers to be no older than 85 years old and to own a property in a certain area, whereas others are more flexible.

By shopping around and comparing criteria, equity release customers can settle on the lender that is right for them.

Equity release companies tend to offer lifetime mortgages and home reversions. Customers are free to choose which one they believe would be the most suitable for them.

However, it must be noted that the customer’s experience of a lifetime mortgage or a home reversion is entirely unique in the sense that each equity release lender has slightly different rules and regulations.

In the UK, the equity release scheme is well-regulated by both the Financial Conduct Authority and the Equity Release Council.

This means lenders cannot create different rules on a whim, or change the rules unreasonably. However, not all lenders are regulated, as they may choose to be independent.

For this reason, you should do your research into equity release companies to ensure you find one that is regulated and that would meet your needs. We will help you get started with some tips on which equity release companies you should avoid.

Please call our 24-Hour Helpline: 0330 058 1579

Which Equity Release Companies Should You Avoid?

When you are looking for an equity release company, there are certain things you should avoid in order to ensure you will be releasing equity in a safe way. Please keep in mind that not all of these suggestions will apply to you, so don’t worry if you aren’t interested in pursuing every single one of them.

1. Companies that are Not Regulated By the Financial Conduct Authority

Firstly, you should always avoid equity release companies that are not regulated by the Financial Conduct Authority (FCA). The FCA deals with equity release complaints, so if your company is not involved with them, they may be able to get away with treating you poorly without consequences.

They also assess the equity release scheme on a yearly basis to figure out what needs modernising, so you would be more likely to benefit from modern additions to equity release and high-quality services if your lender was regulated by the FCA.

For instance, in 2019, the FCA looked into equity release lenders as they do every year, and they decided to make some changes to their regulations (1).

They were concerned that it was very difficult for some customers to switch to more affordable mortgages, so they resolved to prioritise affordability assessments.

As you can imagine, a customer who is with an FCA-regulated lender would now be in a much better position to switch mortgages and release more money than someone whose lender was completely unregulated.

It is also very important that any adviser you have is also regulated by the FCA to ensure you are getting professional advice. The FCA regularly challenges the advice given to consumers to ensure it is accurate and meets each customer’s needs.

For example, in 2020, the FCA found that equity release advisers were not explaining the scheme well enough to their clients (2).

Many clients were refusing monthly payments without understanding the impact of this, which is that their interest would rack up significantly and they would owe more money overall.

Another example is that advisers were relying too much on the Key Facts Illustration, which points to the features and risks of releasing equity, but with zero focus on the personal situation of the customer.

As a result of the FCA flagging these issues and taking steps to resolve them, FCA-regulated advisers are now much more likely to offer personalised advice, and to explain the nuances of equity release in great detail.

Please call our 24-Hour Helpline: 0330 058 1579

2. Companies that are Not Regulated By the Equity Release Council

Similarly, it is very important that your equity release company is regulated by the Equity Release Council. They impose rules on equity release to ensure customers have a positive experience of the scheme.

With an ERC-regulated equity release lender, you would benefit from honest advice from the company, and you would have more flexibility. This is because they are obligated to explain the risks, features and benefits of equity release to you.

The ERC outlines their key standards for equity release products on their website (3). These include: customers being allowed to stay in their property for life, customers being able to move into a different property that meets ERC standards, interest rates being fixed or having an upper limit, customers being permitted to make early repayments without facing charges, and the lender offering a no negative equity guarantee.

The ability for customers to repay their loan early without incurring an earlier repayment charge was only introduced in 2022 (4). This demonstrates that ERC standards are open to change depending on equity release consumers’ needs.

The ERC have acknowledged that people’s financial situations can change after they release equity, and they are accommodating this with their new early repayment standard.

It is possible that an equity release lender would offer an equity release product that does not meet all of the above standards.

However, they would have to inform you of this, and you would have to consent to it. If you did not accept the offer, you could find another ERC-regulated equity release lender that meets all of the ERC standards.

Please call our 24-Hour Helpline: 0330 058 1579

3. Companies Without Competitive Interest Rates

We always advise our clients to avoid companies that do not have competitive interest rates. This is because equity release works on compound interest, so you pay interest on your loan amount every year, and this can amount to a significant value.

Equity release does tend to have lower interest rates than other schemes, but there are still some equity release companies who charge very high interest rates, or variable interest rates that are not capped. We would always advise you to find a company with fixed interest rates or capped variable rates.

This means the amount of interest would not increase quite as much, and you would owe less money by the end of the scheme. If you do not want to deal with compound interest at all, find a company offering an interest only lifetime mortgage, and pay back the interest on a monthly basis.

Even if you are on a low income, you could do this by paying a small amount of interest each month, and even this would make a difference. However, if you are stuck for money completely outside of your loan, it may be best to avoid this arrangement otherwise you would be missing interest payments.

In terms of interest rate statistics, the average interest rate for equity release in 2021 (with a lifetime mortgage) was 3.95%, which is the lowest it has been for many years (5). The lowest interest rate was recorded as 5.72% as a fixed for life rate. The highest interest rate was 8.10%.

Please keep in mind that equity release companies demanding high interest rates should not be dismissed without thought, as they may offer other benefits that would be great for you. For instance, they may offer a fixed interest rate where other local lenders only offer variable rates, or they may offer higher loan amounts than average.

That being said, it is usually possible for customers to find lenders with competitive interest rates that still meet their other needs, so it is wise for you to seek this before you start making sacrifices. An equity release adviser will help you to do this.

It may also be useful for you to read our articles on equity release interest. We have one blog post explaining how you can avoid equity release plans with compound interest, and an article outlining how existing equity release consumers can switch to a lower interest equity release plan.

4. Companies Without Downsizing Protection

If you do not find an equity release company that offers downsizing protection, you will not be alone, as many customers do not understand the importance of this.

However, securing downsizing protection may give you peace of mind as it would grant you the permission to move home whenever you wanted to, without it causing significant problems.

When the time came that you wanted to move into a different property, you would simply inform the lender that you wanted to repay your loan early, and they would not charge you for doing so.

You can repay the loan amount through bank transfer, phone card payment, Direct Debit, standing order, or cheques. Depending on your lender’s regulations and your financial situation, you could either do this gradually or all at once.

Even equity release companies without downsizing protection will often allow you to pay back a certain amount of the money. Often this is up to 10% of the money borrowed per year, but it can even be up to 40% depending on how flexible the company is (6).

However, anyone who potentially wants to downsize in the future and move on from equity release entirely should select a lender offering downsizing protection as they would be able to repay all of the money at once without facing penalties.

Even if you are not sure what you would want to do in the future, it is better to select downsizing protection now in order to have more flexibility later down the line. If you don’t end up using the downsizing protection, you haven’t missed out, whereas if you need it and you don’t have it, you would be stuck.

You can find out more about this by heading to our page all about paying back equity release early.

Please call our 24-Hour Helpline: 0330 058 1579

5. Companies that do Not Assess Your Personal Circumstances

When you take out equity, it is essential that your chosen equity release company assesses your circumstances adequately. This is because your personal situation significantly influences the amount of money you could get.

Some examples of factors that should be considered by the lender are: your property type, your property value, your location, your age, your existing debts, your income, and your living situation.

To give an example of how a lack of assessment could be detrimental, let’s say that an equity release company forgets to check a potential customer’s existing debts. They may not realise that the customer has an existing mortgage.

The reason this is so important is that you cannot receive an equity loan unless you have either paid off your mortgage, or you have made an agreement to repay it using your loan.

If the lender does not look into this, there may be delays in your application. This is why we encourage you to find an equity release company that performs sufficient research into your individual circumstances.

It is also essential that the equity release company performs adequate research into your eligibility, otherwise you may invest money and time into an equity release application that you are bound to be rejected from.

The main things they should be checking are that you are a homeowner, you are at least 55 years old, and your property is worth at least £70,000.

However, it is reassuring if they are also checking your financial situation properly and assessing your needs to discover which equity release plan would be the most appropriate for you.

If you are making a joint application, they should also assess your partner’s situation. This is because both applicants must meet the eligibility criteria for equity release, not just one.

Sometimes, your partner is under 55 and is not eligible, but you can choose to register yourself and add them to the scheme at a later date.

The best way to discover whether you are eligible to release equity is to speak to an equity release adviser, and they will then be able to tell you if you qualify for a loan with your preferred lender. However for now, our eligibility article will give you a general idea of where you stand.

Please call our 24-Hour Helpline: 0330 058 1579

6. Companies that do Not Provide Inheritance Protection

It is a common concern for people releasing equity that their family will end up with no money when they pass away or enter permanent care. This is certainly something to avoid if you want to leave funds to your loved ones.

Some equity release companies offer inheritance protection, which allows you to reserve some of your equity release funds for your family. With a lifetime mortgage, this would look like putting aside some of the loan and not touching it.

With a home reversion, you could keep a share of your property with the intention of passing it on to your family.

However, if you do not intentionally seek this, you may end up with an equity release company that does not provide inheritance protection. Please speak to an equity release adviser about how you can implement inheritance protection, as well as discussing your plans with your family.

We also advise you to explore how inheritance tax works with equity release, as you can ensure your family gets more out of your money if you are knowledgeable in this area.

To give a brief outline, beneficiaries are charged 40% inheritance tax on the money they inherit from their loved ones if the person who passed away owned an estate worth £325,000 or more (7).

This does not apply if the deceased left all of the money above £325,000 to their spouse, to a charity, or to a community amateur sports club. The deceased’s funds include their savings, property, and pension money.

However, most people who take out equity do not end up with an estate worth £325,000 or more, as they have reduced the equity in their estate by using it to fund their retirement.

This means many families of equity release consumers get to inherit their money without paying the 40% inheritance tax on it.

To find out more about how this works, have a look at our post ‘Equity Release and Inheritance Tax: How Much Might You Have to Pay?’

Please call our 24-Hour Helpline: 0330 058 1579

7. Companies Without a No Negative Equity Guarantee

When you take out equity from your property, you are agreeing to borrow money that will be repaid, through the sale of your home, when you go into long-term care or pass away. However, you are also agreeing to pay compound interest on your loan on an annual basis.

This means you will be charged more and more interest each year, as the loan amount will increase on a yearly basis when more interest is added to it. Sometimes, if your property drops in value, you may end up owing more money than you borrowed.

You should avoid equity release companies without a no negative equity guarantee, as they will make your family cover your debts if you get into negative equity.

If your family is not in the position to afford debt repayment, they would have to borrow money themselves to do this, and a vicious cycle of debt may be triggered.

On the other hand, equity release companies with no negative equity guarantees can be life-changing for you and your family, as you can borrow money without ever worrying about your family getting into debt.

If the house sale didn’t cover the loan, nothing would be done, and your family would be free to move on without being responsible for your debt.

That being said, even with a no negative equity guarantee, if your loan amount is higher than your property value, the equity release company would recover all of the money from the house sale, and no funds would be passed on to your beneficiaries (8).

For this reason, it’s important to consider how much equity you want to release, and make sure your lender isn’t pushing you to release more than you would like to.

Some people are in desperate need for money, and therefore they will need to take out as much money as possible — we are not suggesting that these people reconsider their loan amount.

However, others have money that they can use from savings, pension funds and employment income. In this situation, it may be wise for them to borrow a reduced amount of money to ensure their family is left with something when they die or enter long-term care.

Please call our 24-Hour Helpline: 0330 058 1579

8. Companies that do Not Allow You to Move House

We have mentioned that certain equity release companies offer downsizing protection to make it easier for customers to move house. However, we also need to mention that some equity release companies do not allow you to move house at all.

It is extremely important that you find a lender that allows house moves, as you never know what situation you could be in a few years down the line. For example, you may end up needing care without wanting to live in a care home, and in this situation, you may decide to move closer to your family so that they can take care of you.

Another example is that you may want to increase your loan by moving into a higher value property. A lender that allows house moves would allow you to do this. They would simply alter your equity release plan and offer a higher loan amount.

The vast majority of equity release lifetime mortgages can be adapted to allow you to move house, as lenders are aware that customers do not want to be trapped in the scheme.

You can either move into a suitable property and continue to receive an equity loan, or you can exit the scheme completely.

If you continue with equity release, your loan will be adapted in accordance with the value of your new property, so keep in mind that you would have to repay some of the money to move into a lower value home.

However, you should not have a home reversion if you believe you may want to move home at a later date. This is because you would have to sell some or all of your home to an equity release company, and therefore you would not have the right to sell your property after this (9).

Some people would still have enough money to purchase a property separate from equity release, either if their loan amount is very high or if they have other sources of income i.e. savings, State Pension, or private pension.

However, this is a very fortunate position that most people would not find themselves in, so we recommend avoiding home reversions completely unless you are positive that you are going to stay in your current property for the rest of your life.

Please call our 24-Hour Helpline: 0330 058 1579

9. Companies that Charge an Early Repayment Fee

When we discussed downsizing protection, we explained that this scheme allows customers to move home without paying an early repayment fee. But, what is an early repayment fee?

As some equity release lenders want you to stick with them for the rest of your life, they increase the likelihood of this by charging a fee if you want to repay your loan early. This is what is known as the early repayment fee.

You will pay a different amount depending on which provider you are with, and when you took out equity. Often, it will be cheaper to pay back your loan early if you have been on your equity release plan for a long period of time.

There are two types of early repayment charge. The first is called the fixed early repayment charge, and this means that the percentage is either the same consistently, or it functions on a sliding scale i.e. 10% in the first year, 9% in the second year, 8% in the third year etc.

The second type of early repayment charge is the variable charge that changes based on gilts. We recommend avoiding this at all costs as it is possible that the charge will increase significantly in the time period that you want to repay your loan.

We recommend finding an equity release company with no early repayment fees as this ensures you have total flexibility after releasing equity.

If not, make sure your lender caps the early repayment fee at 25% of the borrowed amount, which is something that all ERC-regulated equity release companies do (10).

Please call our 24-Hour Helpline: 0330 058 1579

How to Find the Best Equity Release Company For You

Firstly, make sure you pay attention to our suggestions of which equity release companies you should avoid. We have covered most of the essentials, and with this advice, you could release equity in the safest, most flexible way possible.

Something to keep in mind is that equity release is as safe as you make it. It is a regulated scheme that is only getting safer, but if you do not do your research into the scheme to figure out potential downsides, you could end up with an undesirable equity release company or plan.

Secondly, always speak to an equity release adviser about which company you should go with. Even if they cannot recommend a specific company, they will be able to explain the pros and cons of different companies in your area.

We can help you with this if you call us on 0330 058 1579 and ask us about our free consultations for new equity release customers. In this consultation, we will give you tips on which providers would be suitable for you, which equity release companies you should avoid, and common scams you can be aware of.

Next, remember that not everyone wants to get the same thing out of equity release, and not everyone is in the same financial situation. As a result, there is not one equity release lender that would benefit every single equity release consumer.

Because of this, you need to make sure you know what you want out of an equity release provider. Do you want them to be very flexible? Do you want them to offer a lump sum? Would you prefer for them to have fixed interest rates? Do they need to accept leasehold properties?

If you are unsure what you need to look for, we can guide you in our free consultation. We will ask you about your individual circumstances to find out how equity release could benefit you.

If we believe that you would be in a worse position after taking out equity, we will advise you to consider the alternatives to equity release. These include: returning to work, downsizing, borrowing from relatives, budgeting, remortgaging, credit cards, and traditional loans.

Not releasing equity at all would be preferable to releasing equity with an unsuitable equity release company. However, with Equity Release Warehouse, you do not have to choose between the two. We can help you to access funds from your property with a reliable equity release provider in your area.

To check that we cover your area, head to our home page and browse our locations. We are always adding to this list, so keep an eye on it.