If you are considering joining the thousands of people taking out Equity Release, you may also be concerned if equity release is right for you?
You may have heard mixed reviews about equity release, with most people finding it a fantastic way to realise their financial goals. In contrast, others have had poor experiences in the past.
So, how do you know if Equity Release is a good idea?
Equity release can be an excellent idea for applicants aged 55 and over looking to release tax-free cash from their home. However, you may lose entitlement to some benefits, and you will have less equity in your home to leave as an inheritance to your beneficiaries.
Before we explore the intricacies of equity release, I have built a quiz to quickly help you understand if Equity Release could be a good idea for you.
The quiz is based on my experiences with dealing with hundreds of clients over the past seven years.
Why not take the test to see if equity release is right for you?
Hopefully, you have had a chance to use our quiz. Now, let's explore whether equity release is suitable in more detail to help you decide whether it is a good idea for you.
When Equity Release is a good idea
Equity release can offer a great way to take some of the wealth built into your property. You can spend the money on anything you wish; as the cash released is a loan, it is entirely tax-free.
If you are considering equity release, weigh up all the pros and cons to decide if it is a good idea for you.
I often find equity release can be a good idea:
To repay an interest-only mortgage
Many mortgage lenders are unwilling to extend interest-only mortgage terms and insist on being repaid in full.
Instead of downsizing to repay your mortgage, you can use equity release to repay your mortgage lender.
This helps you avoid the costs associated with moving and allows you to stay in your familiar home.
I have written a complete guide on Equity Release vs Downsizing.
If you have been refused other types of finance
Your eligibility for equity release is not based on your income, and having bad credit is usually not an issue.
If you have been refused other types of loan, you will likely be accepted for equity release, providing:
- You are a UK homeowner
- The property owners are aged 55 and over
- Your property value is at least £70,000
Providing a top-up to income
If you are feeling the pinch of the cost of living crisis, having a little more income would greatly support your day-to-day living.
Equity Release plans can provide you with a top-up to your current income. This could be great to supplement your current work and pensions or allow you to retire earlier.
The most popular way to top-up your income with an equity release plan is to take a drawdown lifetime mortgage.
Drawdown lifetime mortgages provide you with an initial lump sum of money and a pre-agreed reserve facility, which you can draw upon in the future as and when needed.
Importantly, the funds held in reserve do not attract interest, so they could provide a cost-effective way to help top up your income for many years.
I have written a complete guide on draw-down equity release plans.
Inheritance tax planning
Many people with higher net worth are now looking to equity release to reduce their Inheritance Tax burden.
Taking an equity release and moving the money outside your estate can reduce your IHT bill.
This can be a great way to provide an early inheritance to your beneficiaries now and enjoy seeing them benefit from the funds released.
You can read more about using equity release for IHT planning here.
Inheritance is a lower-priority
I speak with clients all the time who have higher priorities than leaving the maximum inheritance possible.
This could be because their needs are greater or they have no beneficiaries to leave their estate to.
Instead of struggling to make ends meet or to live your best life, an equity release plan could allow you to reach your financial dreams.
When Equity Release is a bad idea
Equity release is not suitable for everyone, and there are times when I recommend that you do not take equity release.
Large levels of savings
Suppose you have a significant level of savings in your bank accounts. Even if you want the security it provides, it could be a poor financial decision to borrow money which attracts interest at a higher rate than those your hold in savings.
While different people will want different levels of emergency funds, The Money Advice Service suggests a good rule of thumb is to have three months’ essential outgoings available in an instant access account.
If you hold substantially more, it will likely be better to spend your savings first and then return to obtain an equity release when you need additional funds.
You do not need the money
If you have no specific plans to spend the funds released, I suggest you avoid taking equity release.
Money released will attract interest, and the returns you will get from your savings accounts will be less than those charged by the equity release lender.
A better option would be to consider how much you will spend for the first two years. That money can be your initial release.
Any money you plan to spend in years 3 to 10 could be placed into a reserve facility, which does not attract interest.
When you need the money, a simple call to your equity release lender, and they will send you a form to accept the request for additional funds.
Money drawn from a reserve typically takes two weeks. So it is readily available when you need it.
You have more important needs in the future
Suppose that you have decided that you wish to pay for private medical care in the future. If you hope to use the equity in your home to pay for such care, taking an equity release plan now may limit your ability to pay for private care.
I always discuss your needs now and your plans for the future, including any expected changes to your income and expenditure.
Should you take an equity release plan, we must ensure that it meets your current and ongoing needs.
There is a more cost-effective way to raise the funds
Before taking an equity release, it is essential that you consider all of your alternatives first.
If we identify a more cost-effective way to raise funds, you should explore this first and foremost.
This could be by taking an unsecured loan, a residential mortgage, or selling other assets.
You can read more about alternatives to equity release here.
Short-term need for funds
Equity Release plans are designed to run for the rest of your life. You can repay them early, but there may be significant charges, especially in the first few years.
If your money needs are short-term, you may be better off looking at other forms of finance.
Even if the interest rate is higher, you may likely find that it is more cost-effective.
Before taking an equity release for a short-term need, you should explore the following:
- A bridging loan
- An unsecured loan
- Credit cards
- Help from family
Once you know how much raising funds from other means will be, you can compare that to the total cost of an equity release.
Remember, to take an equity release, you will incur fees, including:
- Financial advice fees
- Legal fees
Plus, if you repay early, you could incur an Early Repayment Charge.
Expecting a change in your circumstances
If you expect a change in your circumstances, equity release may be wrong for you.
You will need to consider not just your needs now but what your future needs will be following changes to your circumstances.
Suppose you are expecting to receive a windfall from an inheritance or that you are expecting a drop in your household income, you need to ensure that you are not taking an equity release plan now, which is detrimental to your future needs.
We will discuss this key area of planning with you during our initial consultation.
To speak with a qualified equity release advisor, you can click here to book your free initial consultation.
Consultations can be over the phone or via video conference.
Pros of Equity Release
- Tax-free cash - The money you release from your home is tax-free as it is a loan.
- No monthly payments required - You choose whether you would like to make payments or not. There is no obligation to pay each month, and you can make no payments for the rest of your life.
- Retain full home ownership - Lifetime mortgages (the most popular equity release plan) are secured against your home like a traditional mortgage. You remain the full legal homeowner.
- Reserve facilities - You can add pre-agreed reserve facilities, which you can draw upon in the future as you need. Minimum withdrawals are typically £500-£2000. You do not pay any interest on funds held in reserve until you draw upon them.
- Fixed for life interest rates - Avoid interest rate shocks in the future. With a lifetime mortgage, your interest rate is set at the plan's start and runs until the loan is repaid.
- Benefits in future property growth - Any future increases in your home's value will be for your benefit. By remaining in your larger value property, future increases could be larger than if you lived in a cheaper home.
- Bad credit accepted - Your eligibility is not affordability assessed, and while bad credit can preclude you from other finance, with equity release, it is not an issue.
- Downsizing protection - Where you can repay your equity release plan free of any penalty if you move home. Some lenders offer this if you move to a new home which they cannot lend on (and you cannot port your plan). Others allow you to repay without penalty if you sell your home.
- Significant life event exemption - If you borrow jointly with another homeowner who passes away or moves into care, you can repay your equity release plan without any early repayment charges. This is a fantastic feature for couples.
- No Negative Equity Guarantee - All Equity Release Council approved plans include this guarantee. Put simply, this guarantee means that you, or more specifically, your estate, will never owe more than the property is worth when it is sold.
Cons of Equity Release
- Less inheritance for beneficiaries - By releasing equity from your home, you will likely reduce the value of your estate. This means that you could have less money available to leave for inheritance to your beneficiaries.
- Potential loss of means-tested benefits - Your entitlement to claim means-tested benefits can be impacted by an equity release. As cash released is a loan, it is not declared as income. However, if you place funds into your bank account which take you over the savings thresholds, you may lose your entitlement to claim.
- Early Repayment Charges (ERCs) - If you repay your equity release balance early - before the death of the last borrower or the last borrower entering long-term care - you may incur an Early Repayment Charge. All plans allow you to make some payments without charge, and one plan allows you to repay after four years without any penalty.
- Compound interest - Should you choose to make no monthly payments, your equity release balance owed will grow. Meaning that you will incur interest upon interest already charged. Many people are put off by compound interest; however, they must also consider any compound growth that they will accrue on their property's value.
- Inability to take other secured borrowing - All equity release lenders require that they are the sole secured charge on your property. This means that if you want to borrow any more in the future, you will need to borrow it from your existing equity release lender. You are not allowed to have other secured borrowing on your property with an equity release.
- Reserve facilities aren't guaranteed - Every equity release lender has the right to restrict future lending, including any pre-agreed reserve facilities. They cannot ask for any monies leant to be repaid early, but in the event of a house price crash, the lender can withdraw a reserve facility (for example, if you are in negative equity).
- Porting risk - If you want to move to a new home in the future and take your equity release plan with you, it will have to meet the lenders' criteria at the time you move. This shouldn't be a problem, but you may have dreams of moving into a non-standard property or age-restricted assisted living, which may be unacceptable.
- Cannot rent out your home - Nearly all equity release plans are designed for owner occupiers, and you are required to let your lender know if anyone else permanently moves in with you. This is not normally a problem; however, if you were planning to leave your home and rent it out, the lender will treat this as you ending the plan. Therefore, you will need to repay your equity release and any associated ERCs.
- Setup costs - To take an equity release, you are required to have both financial advice from a qualified equity release advisor and legal advice from an equity release solicitor. The costs to arrange a plan can, therefore, be more significant than other types of finance. You should budget up to £3,000 to set up an equity release plan.
What to consider when taking Equity Release
When taking an equity release plan, your qualified advisor will be able to best help you understand if equity release is right for you.
You can read my guide on what happens at equity release advice meetings here.
Let's look at a few key areas we will discuss.
Equity release plans are available from age 55, but some plans are limited to those over 60.
There are also other personal underwriting considerations that lenders review, including:
- Upcoming birthdays - If your birthday is in the next six weeks, you may be able to apply as if you were a year older, meaning potentially higher release amounts and lower interest rates.
- Bad debt arrangements - Existing Debt Management Plans (DMPs), Individual Voluntary Arrangements (IVAs), and County Court Judgements (CCJs) will all be considered. Depending on the type and balance owed, you may be required to repay the money owed with your equity release funds.
- Your residency status - You are required to have permanent rights to reside in the UK. If you were born in the UK, this is not a problem, but if not, you will have to provide documentation showing your residency status.
When taking an equity release plan, you will incur setup costs. These can include:
- Equity Release financial advice fees
- Equity Release legal advice fees
- Lender arrangement fees
- Property valuation fees
We will work with you to find the most cost-effective plan; however, I suggest that you budget between £1,500 and £3,000 to take an equity release.
You can add the setup costs of your equity release plan to your loan amount, and we do not charge you anything upfront, only if you complete on an equity release plan.
Changes to needs in the future
If you are expecting changes to your circumstances in the future, you must discuss this with your equity release advisor.
They will be able to guide you through your anticipated changes to ensure that any equity release you take does not detriment your future needs.
The Equity Release Council
We only recommend plans which meet the Equity Release Council product standards.
These afford you extra protections, which we will explore below.
Is Equity Release safe?
Equity Release plans are fully regulated and safe for consumers. In order to take an equity release, you need both financial advice and legal advice to ensure that equity release is right for you and that you fully understand the implications of taking out a plan.
The Financial Conduct Authority (FCA) supervise all financial advice throughout the UK and regulates equity release advice.
Further safeguards are in place for plans which meet the Equity Release Council product standards.
The Equity Release Council product standards
- For lifetime mortgages the rate must be fixed for each release or, if variable, the rate must be capped for the life of the loan.
- You must have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract.
- You have the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan.
- The product must have a “no negative equity guarantee”. This means that when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.
- All customers taking out new plans which meet the Equity Release Council standards must have the right to make penalty free payments, subject to lending criteria.
To ensure that you only proceed with the safest equity release plans, we will only recommend equity release plans approved by the Equity Release Council.
Alternatives to Equity Release
It is essential that you consider all of your alternatives to taking equity release before deciding if it is right for you.
Here are 11 different alternatives which you should explore:
- Sell assets
- Family or friends
- Move home
- State benefits
- Rent out a room
- Change employment
- Do nothing
The list above was taken from my full article discussing GREAT alternatives to Equity Release.
Even if you identify that there is nothing that you could use to replace an equity release in full, the smaller you can reduce your loan, the less interest that you will be charged over time.
So, don't just rule out an alternative if it does not provide you with all the money you need. Even if you can only raise a few thousand pounds from alternative sources, it could be the difference of savings tens of thousands of pounds over the lifetime of the loan.
What does Martin Lewis think about Equity Release?
Martin Lewis states equity release can be a good financial product if you require the funds and are not concerned about the impact on leaving an inheritance. However, he says equity release can be expensive and to always consider downsizing first, as he believes it is the easiest way to release equity from your home.
I have written an article breaking down different interviews Martin Lewis has had discussing equity release. Click here to read when I agree with Martin and when he is wrong about equity release.
Is Equity Release right for me?
Hopefully, by reading this guide, you will be informed on whether equity release is right for you. However, if you are unsure, the best way to proceed is to speak with a qualified equity release advisor.
A qualified equity release advisor will be able to advise if equity release is right for you. They will consider your current position as well as your future needs, along with informing you of the pros and cons of taking equity release. This will result in them either making a formal recommendation to proceed with an equity release plan or providing a more suitable alternative.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor tax advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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