I think you´ll agree with me when I say…
The safety of any product is paramount to ensuring it serves your best interests – both in the here and now and far down the line.
That said, equity release has a myriad of built-in and optional safety features that make it an excellent option for your specific circumstances and needs.
By checking out this straightforward guide, you can find out what is equity release and how safe it is to decide whether you should go for it or not.
Are You Considering Equity Release?
How Safe is Equity Release?
Back in the 1980s and early 1990s, following a wave of corrupt practices in the industry, equity release schemes got a bad name. This occurred as a result of a couple of unscrupulous lenders undertaking expensive deals that resulted in homeowners (and their estates) owing them more than the value of their properties.
Nevertheless, there’s no need to worry.
These instances caused consumers to become weary about the safety of equity release but, on the positive side, resulted in tighter industry regulations.
With the new regulated Financial Conduct Authority, things have improved drastically. Equity release is now safer than ever and progressively becoming a valuable tool for anyone aged over 55 who needs fast access to cash.
Equity release plans are regulated by the Financial Conduct Authority (FCA), and most providers are members of the Equity Release Council, a trade body that sets the standards and best practices for equity release providers and independent financial advisors.
To ensure that you get the right plan, the council stipulates that:
- All rates must be fixed,1 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 on 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 release2 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 equity’3 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 Council offers strict guidance on the sales process and only allows you to take out an equity release loan if you get proper financial guidance and independent money advice services for equity release.
Still wondering is equity release a good idea?
Make Your Retirement Comfortable with Equity Release
Ever since the disastrous period during the late 1980s and early 1990s when unregulated equity release providers took advantage of homeowners, suspicion and distrust has plagued the industry.
Most people were (and some still are) nervous about taking out these plans. However, with various bodies regulating the market and updated requirements for providers and advisers, things now look very different from what they did back then.
Is Equity Release a Safe Option?
Although equity release is one of the most popular financial products on the market right now, there are still various concerns around it, which makes many ask: how safe is equity release?
Well, here’s your answer.
Here are some of the many reasons why equity release is considered to be better than in the past, and why it could be the best decision you make this year.
#1. The Financial Conduct Authority Regulates It
FCA4 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 services.
It ensures that lenders are registered and that they’re following the stipulated codes of conduct.
Moreover, with the FCA at play, you have adequate and appropriate protections in place to ensure your best interests are looked after. 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 best advice on the equity release companies to avoid.
#2. The Equity Release Council
The ERC 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.
#3. Your Family Will not be Buried in Debt
If you want to take out a lifetime mortgage with an approved equity release company, you are most likely to benefit from the no negative equity guarantee.
The ‘no negative guarantee’ was put in place to protect you. It ensures you never owe more than the value of your property – and you won’t saddle your kin with any debt.
If your residence decreases in value significantly and putting it up for sale isn’t enough to pay back your loan entirely, your lender will write it off when you pass away or move into long term care.
#4. You Have the Right to Remain in Your Home
If you have no clue about the perks that come with equity release, you probably think that you sell the rights to live in your home after unlocking the equity.
However, with a lifetime mortgage, you get to reside in your home. You won’t have to sell any part of your property to unlock the capital you require – you’ll be borrowing against the equity.
Therefore, you can continue residing in your home (which you retain ownership of) for as long as you wish to.
Moreover, as per the ERC’s rules, when you decide to unlock the equity from your property, if it’s a joint partnership, you’re assured to remain the sole proprietor until you both die, or you both go into permanent care.
#5. You Can Move House
Most people believe that taking out an equity release plan means being tied up to your current estate forever. Well, that’s not the case. If you want to move houses, you can.
The ERC offers you the right to take your equity release plan with you, as long as you’re relocating to a ‘suitable alternative estate’ – a place that meets the lending rule of your plan provider. It’s worth keeping in mind that if you were to move to a less expensive home, you might have to pay back a portion of what you owe, depending on your lender.
#6. You Must Consult an Advisor
As per the ERC’s regulations, you must receive advice from a suitably qualified professional before heading on to take out a plan.
Your adviser5 must also have special qualifications to become an equity release consultant. If you’re unsure that they’re appropriately qualified, the Equity Release Council has a member’s directory on its website where you can confirm this.
#7. Your Estate May Retain some Inheritance
Since you repay equity release plans (plus the interest) when your plan provider sells your home, it means your whole estate will not be an inheritance.
However, if there’s anything left over after everything’s been paid off, that can go to your heirs (as per your will).
If you, however, want to guarantee an inheritance for your family, your provider can offer you a particular option where you can choose to ring-fence some of the value of your estate. You only have to ensure that you let your adviser know, so they can find an equity release plan that suits your needs.
The Flexibility of Equity Release
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.
Are equity release schemes safe?
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, 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
Yes, unlocking the equity in your estate can be a fantastic idea – if you want to get some extra cash and don’t want to move to another neighbourhood.
Nonetheless, it can reduce the amount of inheritance you leave your family. So, you have to consider taking out a plan that features the no negative guarantee and allows you to ring-fence some value of your estate.
Yes, it’s worth considering. It allows you to unlock the value of your estate by turning it into a cash lump sum or monthly income.
It also allows you to:
- Enjoy financial freedom as you use the money as you wish
- Maintain your independence and the right to remain in your family home
- Enjoy the benefit of having a warranty.
It can be the warranted rates for life on the lifetime mortgage scheme or the no negative equity guarantee that ensures that any equity release scheme is adhering to Safe Home Income Plan (SHIP) regulations.
Equity release involves unlocking the value of your estate or, with home reversion schemes, a part of your property. In as much as it’s an incredible financial tool, it may work out to be more costly in the long run than moving into a smaller apartment.
It also alters your means-tested benefits and prevents you from enjoying the increasing value of your home and reduces the amount of inheritance you leave your family.
Yes, there are several alternatives to taking out an equity release plan. Some of the options include:
- Moving to a less expensive home
- Asking for financial help from your friends or family
- Using your savings
- Capitalising on your investments and assets
Equity release can be a great option in the right situation. However, before making any final decisions, it’s imperative that you understand how does equity release work and whether equity release is right for you.
With that in mind, you should always ensure that you seek advice from an independent adviser, who’ll talk you through the details, thus helping you make an informed decision.
If you have any questions on the safety, eligibility, and workings of this, be sure to use our free online calculator not only to see how much equity you can release but also to chat with an expert.
How Much Can You Release?
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