Is equity release safe?

Knowing what to look for when getting an equity release can help homeowners avoid making costly mistakes or risk losing money. Whether getting an equity release is a safe or wise decision will likely depend on a person’s financial standing along with many factors and priorities along the way.

Those receiving an equity release should be aware that it’s their responsibility to pay interest on money released from the value of the home, so the longer a homeowner lives, the more interest they will have to pay.

For this reason, it’s good to have a clear plan in place and be certain what the details of your loan will be, taking the time to consult with a financial advisor for guidance in order to to make a smart and responsible choice.

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How to Know if an Equity Release is Right for You

There are many factors someone looking to get an equity loan needs to take into account but may include your age, the value of your home, and how much you want to loan.

These also could include any goals you might have for the money, such as helping family members, taking a vacation, home improvement projects, or retirement.

It may also be a smart approach to work closely beside an equity release advisor who can understand your needs and help you make a wise decision. Think about all of the costs involved with an equity release before getting one so that nothing catches you by surprise once you are committed to the process.

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How Do I Know if an Equity Release is Safe?

Begin by looking at your own situation and finances. Think about how much money you expect to have throughout your retirement and how much you will need to get along.

From there, shop around for different types of equity releases to find a plan with options and features that best suit both your goals and limitations.

As with all loans or mortgages, there is a degree of risk associated with equity releases, but by finding a structure that works well and knowing what additional options or features you may need, you can be well-positioned to obtain an equity release that works well for you.

If you are receiving certain means-tested benefits such as pension credits or tax-relief, this is another area that must be considered and discussed with an advisor, as an equity release could have an impact on your eligibility.

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Potential Hazards Associated with Equity Releases

There are several areas when assessing a homeowner’s financial situation that, if left ignored, could lead to mistakes when getting an equity release. Being aware of these potential pitfalls will help you get an equity release that is safe and designed to help you meet your long-term goals. These areas include:

1. It Could Reduce Your Inheritance

Those expecting to leave behind an inheritance for loved ones or family members should consider the impact an equity release could have on what they’ll be able to leave behind.

While you might not be able to leave your entire home behind, there are still options available to leave behind an inheritance if the amount owed at the end of the loan is less than the sale price of the home.

This money will belong to the estate of the homeowner to do with as they please, including segmenting portions of it to specified family members, using it to cover funeral expenses or anything the homeowner chooses.

There are specific features also that can assist homeowners in safeguarding the desired amount to ensure something will be left behind once the loan has finished.

2. Early Repayment Fees

Choosing to close your equity release loan early could bring early repayment fees that can be up to 25% of the total loan amount. These issues need to be closely examined and discussed prior to getting an equity release loan between the lender and the homeowner.

Early repayment fees will depend heavily on your individual plan and lender, so if you foresee early closure as a strong possibility, be sure to find an equity release that has low early repayment fees, or invest in a downsizing protection plan that is engineered to mitigate such potential high fees.

In fact, getting a downsizing protection plan can be an excellent option for someone who likes a proposed equity release plan but is concerned about what may happen should they decide to close early.

3. Loss of Benefits

There is a potential for loss of means-tested benefits if you plan on getting an equity release, and this is why it’s important to speak with an advisor qualified in these areas to help you plan your strategy accordingly.

An individual’s ability to obtain pension credit or tax benefits could be impacted by an equity release, so you’ll need to take these factors into consideration.

It is important to keep in mind that because an equity release uses your money, it is used to calculate eligibility by agencies such as the Department for Work and Pensions (DWP) and other authorities.

4. Negative Equity

A “no negative equity guarantee” is a great feature that can prevent a homeowner who has taken out an equity release from spending more than their home is worth and getting into financial trouble in the long-term.

If you have lots of living left in your home and are still strongly considering a lifetime mortgage, you may want to look into the extra layer of security that a no negative equity guarantee can provide.

Today, it is common to see no negative equity guarantee features included in more equity release plans, and most top providers and lenders do offer some type of no negative equity guarantee on certain lifetime equity release plans.

This can be a good strategy to ensure your beneficiaries aren’t left to pay if your loan inflates to a value larger than that of your home.

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What Kind of Interest Can I Expect to Pay on my Equity Release?

Figuring out what interest rate you will pay on your equity release will depend on many important factors. These will likely include the value of your home, your age, and how much money you wish to lend.

The plan you choose will also have a substantial effect on what your interest rate will be, and it’s important to understand how your interest rate will function – as a “roll-up”, fixed-rate mortgage with compound interest, as with many lifetime mortgages, or one of any number of other interest-rate structures that could be available depending on the plan.

Make sure you find an interest rate that makes sense for you and has your goals clearly outlined before purchasing an equity release, such as a general sense of how much you will spend and what you’ll be using the extra money for.

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Can I Pay the Interest on my Equity Release Early?

Some considering a lifetime equity release may not be fond of the typical “roll-up” payment plan that often accompanies such plans. This occurs when the homeowner passes away or moves to a permanent living arrangement while the property is sold and the debt with interest is paid.

For those preferring the opportunity to pay down what they owe prior to reaching that point, an interest-only lifetime mortgage may be a great alternative.

These plans are very similar to the typical “roll-up” lifetime mortgages in that you can also receive your payment as one lump sum while continuing to live in your own home, but you are instead given a monthly interest payment rather than paying nothing at all until the property is sold (as with other plans).

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What Costs and Fees are Associated With Equity Releases?

There are many fees that can often be associated throughout the process of applying for and obtaining and equity release, and understanding what many of these are and how they operate can help to prepare a homeowner to make good decisions as they move forward toward becoming approved.

Knowing when these fees will be presented and what they are for will provide a person with a better sense of the costs involved with getting an equity release.

1. Solicitor’s Fee

Having a firm foundation in place both legally and financially is important whenever an individual applies for a large loan, and getting an equity release is no different.

Hiring a qualified solicitor to oversee and handle any relevant legal matters up until the point the equity release is signed can be a good way to make sure the process goes as smoothly as possible while also avoiding any unpleasant surprises.

2. Surveyor’s Valuation

Just like when buying a home, a home survey is designed to provide the lender with a solid assessment of how much the property is worth.

It’s very common that this service will be taken care of by the lender themselves, but every situation is unique. This is a fee that is usually paid once the application is submitted, with the purpose being to deliver a reliable estimate of how much money the property is worth (and consequently, can be lent).

3. Financial Advisor

Unless you are prepared to handle everything yourself, hiring a financial advisor who is trained to deal with an equity release can be a wise decision.

Not everyone has hours to spend going over the details of how each equity release plan operates, so hiring someone who does it for a living may make a lot of sense.

It’s best to find a financial advisor you can relate to and who understands your vision for why you’d like an equity release, while also being capable enough to handle the details and particularities involved with your loan.

4. Application Fees

These fees may depend on factors such as the exact nature of your loan and its provider, but are associated with the processing of your application and are generally paid once the plan starts.

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What to Look for to Make Sure Your Equity Release is Safe

It’s important to understand that while it may be a perfect fit for some, an equity release isn’t necessarily for everyone.

The cost of the previously mentioned fees alone typically range from approximately £2,000-£3,000, and interest rates tend to be higher for equity releases than for other kinds of loans, so this is also something to keep in mind.

Those seriously considering an equity release should have a well-rounded understanding of their current financial situation, and think about other available options first before deciding to go through with an equity release.

Making sure you have access to a quality advisor and that any special individual provisions that should apply are included within your loan are steps in the right direction toward making sure you enjoy a safe and secure equity release plan.

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Will I Still Own my Property?

The likely answer is yes – you will continue to own your property until you die or move into a permanent care facility, however, some home reversion plans may differ from this approach, so be sure to check your individual agreement.

Every situation is unique, so find the right payment structure and features to either maintain ownership of your property as you see fit or leave behind an appropriate amount of money after the property has been sold.

Know from the start whether you intend to pay the loan off while living in the house or sell your home once you leave so you can make sure you find the plan that fits your needs.

Regulatory Agencies

Equity release loans are well regulated in the UK, and knowing these agencies and the guidelines they’ve put in place offers a strong basis to ensure your loan follows the safe procedure. Equity Releases are regulated by both the Equity Release Council (ERC) and the Financial Conduct Authority.

There are a set of standards in place established by the Equity Release Council that make clear what plans should include to properly protect the homeowner.

Among these guidelines is the notion that rates should be either fixed or have an upper limit, all loans should have a “no negative equity” guarantee, and the homeowner must remain the owner of their home until they are no longer able to live in it.

Making sure your equity release abides by these guidelines is a good way to have confidence that your equity release is safe and reliable.