Is Equity Release a Good Idea in Oct 2021 & What Are the Pitfalls?

Is Equity Release Safe? Discover the Equity Release Pitfalls & Compare the Pros & Cons

Is Equity Release a Good Idea in Oct 2021? Is It Safe? What About the Pros & Cons? Discover If Releasing Equity is a Good Idea For YOU...

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Is Equity Release a Good Idea?

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Without this vital information, equity release could end up being a nightmare for you and your family!

As one of the 50% of UK homeowners who are over 55, there are some serious options open to you. And, with the right help, you won’t end up signing a dubious plan you’ll later regret.

Luckily, we’ve got the latest inside scoop on whether or not equity release is a good retirement product in Oct 2021.

We’re here to help you discover:

  • If equity release is a good option to fund your retirement in Oct 2021.
  • The benefits of equity release.
  • The advantages & disadvantages of equity release and if you can overcome these.
  • If equity release is right for you and your family.
  • Whether equity release is safe.

We’ve delved into the topic, reviewed over 220 plans, discovered the pros and cons, and looked at why in the UK today, a retiree takes out an equity release product every 12 minutes.

Perhaps you’re next? Let’s find out now!

What Is Equity Release?

Equity Release is a type of mortgage that allows older homeowners to borrow money against the value of their estate.

If you’re 55 or older and own a home in the UK, you might qualify for an equity release mortgage.

Before you continue reading, we’ve summed up the most important information about equity release in this quick video.

Learn More: What Is Equity Release?

How Does Equity Release Work?

An equity release mortgage is, in a nutshell, a loan plus interest that is paid back to the lender when the homeowner passes away or goes into permanent care. The homeowner’s family usually pays back the cash released (and the interest incurred) from the sale of the home in question.

Equity release is available for individuals or couples over 55, with the youngest homeowner’s age determining the amount of equity that can be released. It is important to note that some equity release schemes may require the homeowner to be 60 or older.

The money you release can be taken as a lump sum, paid out in several smaller sums (or a combination of the 2), or in the form of a monthly salary.

Learn More: How Does Equity Release Work?

types of equity release

Types of Equity Release

There are 2 main types of equity release in Oct 2021, a lifetime mortgage and a home reversion plan. It’s essential to understand the details of both plans to decide which works best for you.

Lifetime Mortgage

lifetime mortgage is the most common form of equity release and it allows you to secure the loan against your primary residence. A lifetime mortgage is tailored to run for your lifetime, during which the house remains 100% yours, and therefore stays in your name.

Unlike traditional residential mortgages, it has no payment requirements, and you can continue living in your home. The money you release (plus interest) is repaid when you die or if you relocate to long-term care.

If there’s any cash left after the loan has been settled, it goes to your estate and can be distributed as outlined in your will.

Home Reversion

home reversion plan is another option that you can consider. You raise money by selling all or part of your home while continuing to live in it until you die or move into permanent residential care.

home reversion

Is Equity Release Worth It?

Yes and no.

With compound interest, you’ll end up paying a lot more for your loan than the amount of cash you receive.

Although you can only unlock somewhere around 35% of your property’s value, you could find yourself in a position where your entire home’s value is used to pay off the loan.

However, don’t be deterred. Equity release may not be an ideal move from an investment point of view, but it’s definitely a good option to receive reasonably uncomplicated capital.

Is Equity Release Safe?

How Safe Is Releasing Equity in Oct 2021?

Recent Changes in the Equity Release Market

Great news! The market has shifted!

In the 1980s and early 1990s, after a wave of corrupt practices in the industry, equity release schemes got a bad name. This occurred due to a couple of unscrupulous lenders undertaking expensive deals that resulted in homeowners (and their estates) owing more than the value of their properties.

Nevertheless, there’s no need to worry. Is it really safe today?

These instances caused consumers to become wary about the safety of equity release but, on the positive side, it resulted in tighter industry regulations.

With the new regulator Financial Conduct Authority1, things have improved drastically. Equity release is now safer than ever and progressively becoming a valuable tool for anyone over 55 who needs access to cash.

Equity release plans are regulated by the Financial Conduct Authority (FCA), and most providers are members of the Equity Release Council2, a trade body that sets the standards and best practices for equity release providers and independent financial advisers.

safeguards

What Safeguards Are There for Equity Release Plans?

To ensure that you get the right plan, the Council stipulates that:

  • All rates must be fixed, or if not, the plan provider must have an upper limit or cap set for the lifetime of the loan.
  • You have the right to live in your property for life or until you move into long-term care, so long as you abide by the terms and conditions of your equity release scheme.
  • You can choose to move to another property as long as your lender is satisfied that the new property offers the same level of security for your equity loan.
  • Any lifetime mortgage plan must come with a ‘no negative equity3  guarantee’ which means that when your home is sold, and solicitors’ and agents’ fees have been taken into account, if the amount left is not enough to pay the unsettled loan, neither you nor your estate will be liable to pay any more.

Moreover, for your security, the Equity Release Council offers strict guidance on the sales process. It only allows you to take out an equity release loan if you get proper financial guidance and independent money advice services for equity release.

Equity Release Safety

2 Reasons Why Equity Release is a Safer Option Today Than in the Past

Here are some of the many reasons why equity release is considered better now than in the past and why it could be the best decision you make this year.

The Financial Conduct Authority (FCA)

The FCA¹ is the official financial product watchdog, overseer, and regulator in the UK.

What does it do?

The trade agency oversees the lenders, brokers, and financial advisers who deal with financial products, including equity release service providers.

It ensures that lenders are registered and that they’re following the stipulated codes of conduct.

Moreover, you have adequate protection to ensure your best interests are looked after with the FCA at play. They also provide consumers with a way to take action against providers who are not conducting themselves according to the law, and will give you the best information on the equity release companies to avoid.

The Equity Release Council

The Equity Release Council (ERC)

The ERC² is the equity release governing body, and thus it insists that its members heed to a strict code of conduct designed to safeguard consumers.

Some of these safeguards include:

  • Every consumer should receive financial and legal advice to ensure that equity release is the right option for them
  • All equity release products must have a ‘no negative equity guarantee’ – your loved ones won’t have to pay back the excess outstanding loan amount if your property sells for less than you owe
  • You have the right to reside in your home for life
  • If you want to take out the equity from your home, you must have at least one or two face-to-face meetings with an independent solicitor who will handle the legal aspects

If you choose to take out an equity release plan, ensure that your plan provider is a registered member of the Equity Release Council.

Now that we’ve answered your question “is equity release safe?”, you’ll know that equity release can be a great option in the right situation. 

Pros & Cons

Equity Release Pros and Cons

A blind step into the world of equity release could leave you with massive regrets!

While equity release has changed the lives of close to 20,000 UK homeowners in the first half of 2021, there are risks involved, like all financial products.

In addition, there are life-changing pros, and if you’re not aware of these, you could end up spending largely more than you need to and make irreversible life-altering mistakes.

Equity Release Benefits

What are the Benefits of Equity Release in Oct 2021?

Equity release is increasing in popularity in the UK for a reason. It is the perfect way to give you financial freedom while still retaining the liberty to live in your home.

Check out these 6 incredible benefits of equity release!

The obvious advantage of equity release is that it gives you money to spend now, rather than leaving it locked away in your home.

But is equity release a good move? Equity release has some fantastic benefits, and here they are!

1. It’s Tax-Free

The great thing about equity release is that it’s seen as a loan and not income, therefore making the funds released tax-free.

2. It’s Convenient

Equity release is a reasonably straightforward way to access large amounts of money if you’re over 55. Your financial adviser does the groundwork for you.

In addition, you can release the cash in a lump sum, monthly payments, or a combination of both.

Drawdown facilities available on some mortgages allow you to borrow and pay interest only on the amount you need, therefore lowering the costs.

You Get to Stay in Your Home

3. You Can Remain in Your Home

The great thing about equity release is that you (and your partner) are entitled to remain living on your property as long as you want to. You can stay until you pass away or move into a permanent care facility.

If you wish to, you can also use the funds to hire in-house care, should this be required.

According to the American Psychological Association (APA), selling your home and moving to an unfamiliar place can be emotionally and physically draining. It’s no wonder then that getting to stay in your beloved home is one of the primary benefits of taking out an equity release plan.

Learn more about: 12 Popular Equity Release Uses

You Get to Live a Life of Luxury

4. You’ll Never Go Into Negative Equity

As per laws set out by the Equity Release Council, you will never go into negative equity. Your family will not pay more than the sale value of your home when the plan ends.

Even if property prices drop, any additional equity release debt will be written off.

5. You Don’t Have to Make Repayments

Great news!

You never have to make any repayments with equity release. The loan, plus interest, is paid back through the sale of your house.

However, there is flexibility. Should you wish to, you can make monthly interest repayments. This will stop the interest compounding too much and likely result in more inheritance left to your family.

Protect Your Estate & Beneficiaries

6. You Can Protect a Portion of the Value of Your Home to Pass On

Some equity release providers allow you to set a certain percentage of the house that is guaranteed to be passed onto your family.

Take note: this may affect your interest rates and the amount of equity you can release.

7. It’s Flexible Compared to Traditional Mortgages

Unlike traditional mortgages, equity release plans provide you with peace of mind. Most of the schemes don’t require you to make any repayments, and, as such, you cannot get into arrears, default, or have your property repossessed for non-payment.

As the equity release market continues growing and with more products entering the market every day, most providers give you plans with greater choices. They are:

  • Schemes with a fixed rate for life, meaning you’ll always know how much you’ll have to pay back in the future
  • Fixed early repayment charges, so you‘ll be aware of the exact penalty if you wish to repay your plan early
  • Schemes permitting you to make ad hoc voluntary payments which, in the long run, will aid you in managing your future balance
  • Downsizing protection elements make sure you can repay your equity release scheme, without penalty, if you move home after five years from the inception of the plan

8. Equity Release is Convenient With Low Interest Rates

In the past, equity release was not always a desirable option due to higher interest rates.

Luckily, interest rates are at an all-time low! You can, therefore, release cash tied up into your home without worrying about excessive rolling interest.

Disadvantages of equity release

Disadvantages of Equity Release

4 Equity Release Disadvantages & Dangers of Equity Release in Oct 2021

Despite the vast benefits of equity release, there are, of course, some cost you anything from £1500 to £3000.

These costs will vary, depending on your selected provider and plan and the cost of your adviser. You can generally pay these fees from the money released from your home.

It’s all here: The Costs Involved in Releasing Equity in 2021

2. It May Make Remortgaging Difficult

Releasing equity from your home could make it more difficult to remortgage your property in the future, as it may cause you to have a charge against your property.

In addition, there are usually early repayment charges. It’s best to enquire about these in advance before agreeing to release equity from your home.

3. It May Affect Your Benefits

Equity release can increase the amount of cash in your savings. Therefore, it’s possible that you won’t qualify for benefits like council tax credit or a pension after you have released equity from your home.

4. It Might Erode the Value of Your Inheritance

When you unlock cash tied up into your home through equity release, you are essentially using your assets instead of leaving them to your family.

If you release equity and the total sale of your home covers the loan, there will be nothing left to inherit if you don’t have additional assets.

Am I Protected When Using Equity Release?

The short answer is YES!

In the past, equity release was not regulated, and many dubious lenders took advantage of older folks.

Luckily, the Equity Release Council now regulates this product and its providers, ensuring that you, the client, are sufficiently protected in Oct 2021.

TOP TIP: You MUST use a lender that is a member of the Equity Release Council.

lady reviewing equity release pitfalls

Equity Release Pitfalls

8 Pitfalls of Equity Release You Must Know

Equity release can be a costly mistake, and this might be your reality if you aren’t aware of the pitfalls!

You could find yourself in serious trouble. Don’t be the next homeowner to unlock equity, only to regret it later.

Pitfall #1: Spending Money for Nothing

The main pitfall of equity release is the possibility of taking out more cash than you need. If you do this, you will end up spending a lot of money for nothing. 

What’s more, with a lifetime mortgage, you will be charged more interest than what you will earn if the cash is in a savings account.

Pro Tip: Only release enough cash to cover your foreseeable expenses in the next 2 to 3 years, plus have a pre-agreed reserve for the future.

There's ’Rolled Up’ Interest in Your Mortgage

Pitfall #2: The Lifetime Mortgage Compound Interest “Catch”

When releasing equity from your home, you will likely go with a lifetime mortgage, as this is the most common form of equity release. Another common form is a home reversion plan.

With a lifetime mortgage, it will usually be up to your family to pay back the loan plus rolling interest accumulated at a fixed interest rate. Should you wish to, you can combat this compound interest by making small monthly repayments. But you are not obligated to do so.

Here is an example:

Let’s say you release £50 000 from your home at an interest rate of 5%. In the 1st year, the interest charged will be £2 500, whereas by year 10, the interest charged will increase to £3 878.

However, based on steady property growth in the past, the value of your property is also likely to increase with time.

Note: Interest will only be charged on your equity release balance and not on any property value increases.

You Get a Reduced Inheritance

Pitfall #3: Releasing Equity When You Are Younger

When it comes to equity release, the older you are, the more money you will be able to release from your home, and the lower your interest rates will be.

If you borrow when you are younger, your plan will likely last longer, increasing the amount of compound interest, and making it slightly riskier.

Limits to the Amount You Can Release

Pitfall #4: Early Repayment Charges

We don’t always know where life is going to take us. You might release equity from your home, only to later find out that cancelling the plan is your only option due to life changes.

If you cancel your plan before you die or move into permanent care, you may have to cover hefty early repayment charges.

These charges can differ from one lender to another, with some having fixed penalty charges over a set period. In some cases, these can be as much as 25%.

Luckily, there are 2 early repayment exceptions to look out for:

  • Downsizing protection allows you to repay the loan when moving to a new home.
  • Significant Life Event Exemption allows you to repay the loan within 3 years of the first borrower dying or moving to permanent care.

Be sure to enquire about these rates before selecting your equity release plan.

You Miss Out on Increasing Property Market Values, and That Matters

Pitfall #5: The ‘Setup & Forget Catch’

A lifetime mortgage can sometimes be a “setup and forget” situation, causing you to overpay with time.

How can this be?

Equity release interest rates have continued to drop over the past few years! You need to stay up to date with equity release news to see if you can switch your plan to one with better interest rates.

If you are not paying attention, you might end up spending more than you need to!

There Are Early Repayment Charges

Pitfall #6: You Miss Out on Increasing Property Market Values, and That Matters

A home reversion scheme involves you selling all or a portion of your home to a provider for a cash lump sum and the right to remain living there. It’s essentially shared ownership of the house.

The lump-sum cash from your home could be something you need but it’s important to consider negative equity.

When your provider decides to sell the holdings, they will get a share of the proceeds.

This means that you and your loved ones will not benefit from the full upsurge in the property’s value appreciation. For example, if you were to sell a 50% stake in your estate to an equity release provider, you would only see 50% of any future house-price upturns.

This is why it’s best to get equity release advice from the proper people who care and will get you the correct information.

Your Benefits Are Affected So Be Aware

Pitfall #7: Your Benefits Are Affected So Be Aware

By getting income from your equity release, you will be more cash-rich. This might harm your eligibility for means-tested benefits.

Pitfall #8: You Get a Reduced Inheritance

Equity release reduces the merit of your securities, meaning a reduced provision for your heirs.

That said, you shouldn’t be panicking. Some equity release schemes come with an ‘inheritance protection guarantee’. This allows you to ring-fence off a portion of your home’s value which is guaranteed to be passed on to your beneficiaries when your property is sold.

Some equity release companies like Aviva and More2life in the UK provide you with even more security features.

Bear in mind that if you select a higher percentage of the provided security feature, you’re more likely to get a reduced maximum loan amount when you apply for equity release.

If that’s what you need, then be sure to talk to your financial adviser for professional advice.

Is Equity Release a Good Idea for Me?

Is Equity Release a Good Thing for Me in Oct 2021?

Are you over the age of 55? Do you own your property or have only a small mortgage but are cash strapped?

If so, then equity release might be the answer you have been looking for. You might also want to discover the equity release alternatives before making your final decision.

In addition, some reasons to consider equity release include:

  • Your financial adviser has said it’s the best option for you and your home.
  • You don’t have sufficient funds to retire.
  • You are not keen on downsizing.
  • You have no one to leave your money to, or you don’t mind reducing your inheritance.

Here are the reasons to consider an alternative:

  • Your financial adviser has said that equity release isn’t a good option for you.
  • You have other means of income that you can use to fund your retirement.
  • You are keen to move into a smaller or cheaper property.
  • You desire to give your family optimal inheritance when you pass away.

Equity release can be a brilliant financial product for retirees who own their homes.

So YES, under the right circumstances, it can be a great thing! Hence equity release’s continued rise in popularity.

Just be sure to start the process by speaking to an independent financial adviser, and use a provider that is a member of the Equity Release Council.

Equity Release Advice

How to Find the Best Equity Release Advice in Oct 2021

It’s essential to find the best financial adviser to help you along this journey. They will be available to answer all your questions, guide you on the process, and help you find the perfect plan to suit your needs.

You can find a financial adviser by:

  • Searching for available professionals around you on Google.
  • Searching on the Equity Release Council’s website.
  • Looking at your local media outlets and notice boards.
  • Asking friends and family members for personal referrals.
  • Via searches on social media channels.

Got Questions? Check These Out First

Is Releasing Equity From Your Home a Good Idea?

Is Equity Release Still Worth Considering in 2021?

Despite the Pitfalls, Why's Equity Release Popular?

Why Should I Still Consider Equity Release, Given the Pitfalls?

Is Equity Release Safe?

Am I Protected When Using Equity Release?

What Are the Advantages of Equity Release?

What Are the Disadvantages of Equity Release?

What Are the Problems With Equity Release?

Conclusion

There is nothing more stressful than having financial concerns. The last thing you want for your retirement is to focus on juggling limited funds while covering household expenses.

Equity release is a fantastic way for you to have enough cash during your retirement, and should you wish to, you can still take out a plan to leave your family inheritance.

Be sure to use our free Oct 2021 online calculator to find how much equity you can release! In addition, consult with a financial adviser to start your equity release journey. You can also chat with an independent adviser for free!

Editorial Note: This content has been independently collected by the SovereignBoss advisor team and is offered on a non-advised basis. Sovereignboss may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.

Contributors: Nicola Date, Katherine Read
Reviewed by Francis Hui

Is Equity Release a Good Idea?

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HOW MUCH EQUITY CAN YOU RELEASE?

Most people are using equity release as a means of retaining the use of their house while also obtaining a lump sum or a steady stream of income. Get matched with an expert and check your eligibility for equity release options.

Use our free equity release calculator & see how much you can release today.

How Much Can You Release?

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Written by
Rachel Wait
Personal Finance Journalist

Rachel is an experienced finance journalist and editor with a particular interest in personal finance and consumer affairs. She has vast experience writing about money issues, property, insurance, and consumer affairs, and you’ll find her articles regularly featured in top media and newspaper publications.
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Written by
John Lawson
Founder SovereignBoss

John is passionate about education and has made it his life-long mission to assist UK citizens on their future financial options, with a specialist interest in equity release, and SovereignBoss is the natural extension of this passion.
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Written by
Francis Hui
Senior Risk Manager

Having held various high-level roles across the industry, Francis is truly an expert in aiding UK citizens in their financial decisions and risk analysis. His unique insight and statistical knowledge make him the perfect person to help you take your financial future to the next level.
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Written by
Katherine Read
Financial Planning Reporter

Since joining the editorial team at SovereignBoss, Katherine has become focused on bringing transparency to finances and opportunities for those approaching retirement age. She writes on the topics of equity release, home reversion, and mortgages.
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Written by
Nicola Date
Writer & Financial Journalist

Nicola is a financial writer for SovereignBoss and is passionate about the opportunities that equity release can open up for homeowners. Her extensive business experience and deep understanding of the industry means that she’s always up-to-date with the latest developments.

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