Equity release interest rates are at their lowest ever, starting from 2.47% AER, and will be fixed for the rest of your life – so now could be a good time to consider your options. Equity release helps you free up money locked up in your house, allowing you a lump sum of cash to spend as you want.
So, releasing equity could be a smart idea if you’re considering a home or garden upgrades, looking to support your family financially, planning a lavish vacation, or need additional retirement income.
If you’re property-rich but cash-strapped, and you’re over a certain age, releasing equity from your home might be on your mind. A growing number of homeowners over 55 are considering equity release as a way to boost their finances and assist younger family members through the pandemic.
Is equity release worth considering?
If you’re reluctant to move but want to access some of the tax-free wealth, you have tied up in bricks and mortar, and an equity release is something that may be worth considering. And as more homeowners ponder equity release, lenders have been rushing new products to market.
Is equity release a good idea for me?
Your situation will decide whether or not equity release is suitable for you. The following are some reasons to think about it:
- Your other savings and/or sources of income will not be enough to meet your needs in retirement.
- You don’t want to (or can’t) downsize
- You don’t mind reducing your family’s inheritance (or you have no beneficiaries)
- You have researched to see if you can get government grants or local council grants for certain things and approached the Department for Works and Pensions to see if you can claim any extra benefits into retirement
- You have spoken to one of our equity release qualified advisers
Some reasons to choose an alternative to equity release include:
- You can meet your income needs in retirement from other sources
- You have the opportunity to release money from your home by downsizing
- You want to preserve as much of your estate as possible for your family to inherit
Equity Release – What to consider
With men and women living into their 80s on average, it’s important to think about how you’ll pay for old age (and any care needs that come with it) before releasing equity too soon. If you have other choices open to you, such as downsizing or moving to a less expensive location.
The sum you owe on a lifetime mortgage typically rolls up. There are options to make payments to the lifetime mortgage so your debt does not increase to quickly, some have an inheritance guarantee, enabling you to ring-fence a portion of your home’s worth to pass down to the next generation. You will, however, never owe more than the property’s worth (as long as you use a company that is a member of the Equity Release Council, which offers a no-negative equity guarantee). The most popular scheme is known as a Lifetime Mortgage.
The most common form of equity release plan is a lifetime mortgage, which accounts for the vast majority of equity release plans taken out. These are loans secured on your house that you don’t have to pay interest on and are open to anyone over 55. The interest is instead accrued and added to your loan. Previously, lifetime mortgages were generally lump sum payments made all at once, and a sizable percentage of homeowners still favour this form of equity release.
What about retirement interest-only mortgages?
Retirement interest-only (RIO) is a newer alternative that works similarly to lifetime mortgages (except that it has no end date) in that you pay interest but only pay off the capital when you go into treatment or die. You must pass stringent mortgage affordability tests to show you can handle the monthly interest payments. More than 70 RIO mortgage products are available to choose from. The prices aren’t fixed for the rest of your life, as with lifelong mortgages.
Many older people find equity release helpful, but they are not for everyone. Releasing equity from your home entails some risks and can only be undertaken as part of a broader financial plan. Equity release is a consideration of later life preparation. Individuals should seek the guidance of an Equity Release adviser who specialises in this field and can find the best offers on their behalf, ensuring that the advice offered is suitable for their needs now and in the future.
NEED TO KNOW
- Before you approach equity release companies, seek advice from one of our Equity Release Experts.
- Talk to your family about your plans. It’s your money, but it will have implications if you (or they) are expecting to inherit.
- Make sure you choose a product from a company that is part of the Equity Release Council.
- There will be various fees to factor in – from £0 upwards.
- Releasing equity could also affect your right to means-tested state benefits such as Pension Credit or Income Support. If you are receiving care at home funded fully or partially by your council, it may start charging you or ask you to pay more.
Is there a downside to equity release?
The only downside is it leaves less inheritance for family but in some cases this can be a good thing depending on your estate value, because equity release is classed as a debt it reduces the families Inheritance tax bill.
What are the alternatives to equity release?
Depending on the circumstances, there are some alternatives to equity release that might be more suitable: Loans that are not backed by collateral. If you only need a small amount of money and can pay it back with your retirement income, an unsecured personal loan might be a better choice. Extensions of mortgages If you haven’t paid off your existing mortgage by the time you retire, your current lender will be willing to extend the period for another five or ten years.
Many lenders are now providing retirement interest-only mortgages, which allow you to pay only the interest each month. Some lenders don’t have an upper age limit for applicants, making them a viable option for equity release (Or retirement Interest Only Mortgages). Reduction in size If you need to free up a large amount of money, selling your home and downsizing may be an option. However, with agent fees, removal costs, and stamp duty to remember, the costs can be very high. More information on property downsizing can be found here. Grants and rewards Local government funds may be available to low-income people who borrow for home renovations or conversions to accommodate disabilities.
Where can I get equity release advice?
Before using equity release, seek professional advice. Advisers should hold CeRER qualifications.
At Mortgage Saving Experts, we are always happy to chat and answer any of the questions you might have about Equity Release, explore other options and advise you how equity release would affect your entitlement to state benefits.
It’s prudent to borrow the minimum amount you need to or choose a drawdown scheme to give you the option to borrow money as and when you need it. Consider taking out a scheme that lets you make interest payments each month if you can afford to. Choose a scheme with no early repayment charges or ones that apply only for a limited period.
Tips for choosing the right equity release scheme
- Consider all the alternatives first
- Only borrow the money you need or choose a drawdown scheme
- Consider interest repayments or inheritance protection options
- Compare the whole of the market
- Get independent advice from a qualified equity release adviser
- Check options for early repayment
Does equity release offer any other safeguards and protections?
Equity Release is regulated
The equity release schemes that were available many years ago were not regulated.
The disadvantages of these schemes were that they lacked the legal safeguards that modern-day proposals do. The Financial Conduct Authority (FCA), the UK’s financial services watchdog and regulator, controls the industry. This means that all lenders, brokers and advisers must have the permission (authorisation) of the FCA to lend and/or give financial advice. They must also adhere to the FCA’s stringent code of ethics. Furthermore, being governed by the FCA ensures that customers are provided with sufficient and effective safeguards.
Equity release follows a strict Code of Conduct
Since 1991, the Equity Release Board (now the equity release council) the industry’s governing body, has been regulating the industry (ERC).
Equity release is regulated by the FCA and the equity release council is a body who has codes of conduct for lenders and advisers alike to register to but it’s not compulsory. We are members of the equity release council and abide by their codes of practice ensuring better standards and products for our clients. Consumers are covered by the ERC’s strict Code of Conduct, which is intended to keep you secure financially. These include:
- You must receive financial and legal advice.
- That all products must have a “no negative equity guarantee”, – which means that your loved ones will never repay more than the value of your home.
- That you can stay in your home for life.
- That all those taking out equity release have at least one face-to-face meeting with an independent solicitor.
Equity release is a recommended financial product, which means you can’t take out a plan without first seeking useful financial advice from a trained professional.
To become an equity release advisor, advisors must have completed special training. Mortgage Saving Experts has a team of specialist, fully qualified and insured equity release advisers.
Rest assured that all the Mortgage Saving Experts’ advisers are listed as qualified members of the Equity Release Council.
Your solicitor takes care of the legalities
As previously reported, you must consult with an independent solicitor at least once during the equity release process. Though your solicitor cannot offer financial advice, they will make sure that all of your paperwork is in order and that any legal pitfalls are prevented.
The flexibility of equity release
Traditional mortgages don’t have the same protection level as equity release plans, so it’s a good idea to learn about them before considering one.
Many plans, for example, do not require any repayments, so you cannot fall behind, default, or get your home repossessed for non-payment.
The latest generation of plans also provides various features and choices that you can customise to build the right plan for you now and in the future. These include: It’s always a good idea to discuss these with your equity release advisor, but they include:
- Plans with fixed interest rates for life, meaning you’ll always know how much you must repay in the future.
- Fixed early repayment charges, knowing exactly what the penalty may be if you wish to repay your plan early.
- Plans allowing you to make ad-hoc voluntary payments which could help to manage the future balance.
- Compassionate early repayment charges, allowing penalty-free repayment of a plan within three years of a partner dying or moving into long-term care.
- Downsizing protection means that you can repay your equity release plan penalty-free and move home once your plan been in place for at least 5 years.
The impact of interest
While rates have become more competitive in recent years, equity release policies have historically higher interest rates than conventional residential mortgages.
According to research from the financial data platform Moneyfacts, the average rate for equity release mortgages dropped below 5% for the first time in July of last year.
Besides, the number of products available has increased to 369 from 51 just five years ago.
However, even at a 5% interest rate, the expense of equity release easily climbs.
For instance, if your home is worth £400,000 and you release a fifth (20%) of its value – £80,000 – at a 5% interest rate, the cost of your lifetime mortgage will rise as follows:
As you can see, it’s basically a reverse mortgage that can eat away at your home’s value over time.
Compounding, or interest on interest, will result in your home’s value being lower than the amount owed against it when you leave. Compounding interest means the amount you owe increases month by month so the amount of equity you have in your property reduces on a monthly basis.
Some equity release mortgages are not conforming to the equity release Council conduct of business rules so there’s a risk of negative equity in the future (this would occur after having your equity release mortgage for years).
Many equity release plans now come with a ‘no negative equity guarantee.’
This means even if you do end up in negative equity when you die or move into care, you or your estate will not have to pay any difference to your provider.
There are now programmes that allow you to regularly pay off interest or even capital, which may help you escape the compounding effect.
You could be better off looking into a retirement interest-only mortgage if you’re able to make regular payments, maybe from your pension income.
It’s also worth speaking with a mortgage broker because you may be able to get a regular residential mortgage. (we can offer regular mortgages at Mortgage Saving Experts so why not talk to one person and cover all bases)
Lenders have gradually increased the age at which they can sell regular mortgages over the last five years, with Some lenders offering mortgages until the oldest person is aged 80.
Equity release calculator
Give our equity release calculator a go [LINK TO IT]
Our calculator will give you an idea of just how much money you could release from your home. Choose your age, property type and estimated property value.