Are you looking to release some equity from your property to fund a comfortable retirement? As more people live for longer, there is a growing need to consider ‘Is Equity Release Safe?’
The good news is that with the right balance of risk and reward, it can be safe.
What’s Equity Release?
Main article: What is Equity Release
Let’s get started!
Equity release can be a way to access some of the value in your home and use it for whatever you like. It might sound similar to taking out a mortgage.
Still, equity release is different because when you take out a mortgage, it’s usually returned after the term expires so that you own 100% of your property again – with an equity release plan, some or all of what’s left could stay under someone else’s ownership as long as they’re willing to let go.
Equity Release Plans are not regulated by UK law and come from offshore investment providers who offer them on behalf (and in conjunction) with banks and building societies. There are various costs involved, which we will discuss later on in this article; however, if done correctly, then Equity Release could be the perfect solution.
There are different types of equity release plans. Therefore, it is important to understand the differences to make an informed decision.
There are two types of Equity Release Plans:
Let take a look:
- Lifetime Homeowner Plan (LHP) – this plan allows you to borrow up until 50% of your home’s value, but as we’ll discuss later on during our article, there might be some downsides attached if you do decide to take out an LHP;
- Flexible Drawdown Plan (FDP) – these allow for higher borrowing limits than LHPs and can also help with financing long term care fees should you require them at any point in your life.
Equity release could be a perfect solution for those looking to have a more disposable income plan without worrying about losing their home.
How Safe Is Equity Release?
The first thing to consider before deciding on whether equity release is right for you or not is the question of how safe it is.
Equity release can come as a solution if you’re looking for more disposable income without having to worry about losing your home – but there are some downsides attached with this type of finance that will be discussed later during our article. For those who decide they want to go ahead and proceed with an LHP, their house becomes both collateral and asset at the same time, which means that should something happen where they default on payments then depending on what’s written in the agreement between them and their lender (the company providing them with equity release) the house could end up being seized by the said equity release lenders.
If you decide that equity release is the right option for you, then it’s important to be aware of these risks so that you know what your options are when they do arise.
Is Equity Release a Safe Option?
This is a question many people are asking themselves. The answer to that question, in short, is no. Equity release isn’t safe because there’s always the chance of something happening where you might default on payments and lose your home or have it seized by lenders.
That said, if you’re considering equity release, then it’s important to be aware of these risks so that when they do come up, you know what your options are.
Equity Release Is Very Flexible
Some people like the fact that equity release is very flexible. For example, you can use it to fund a deposit for your next house, pay off some debts, or you might even decide to take out a lifetime mortgage product so as not to have any form of debt in later life when you’re unable to work.
A lot of elderly homeowners want to stay put where they are and not move. They’ve made their home into somewhere that feels like an extension of themselves. Moving away from this would feel too hard on them emotionally. Equity release allows these people who don’t want to leave their homes but need more money either now or in retirement because they’re not working, staying put and maintaining their independence.
Equity Release Is a Better Option Than Selling Your Home
Some people might think that an equity release is an expensive option as they could sell their house instead if they need some money quickly.
But in reality, selling your home can be a stressful process with lots of costs involved, such as paying the estate agent’s fee and moving expenses you don’t have when using equity release.
And the good news?
You can also get more cash by getting an equity release loan against your property than from any other way of borrowing or raising funds against it, so this would be a better option for most people who are looking at options like these because it will provide them with the most amount of financial security without having to worry about where they are going to live.
How Equity Release Evolved
In the UK, equity release was first offered in 1977. Back then, it wasn’t a popular option because people felt no need to borrow money against their homes when they could just sell and pay off debts with cash from the property sale.
However, nowadays, things have changed dramatically as more people are over 60 years old than ever before, which means that many older homeowners who can’t afford retirement face downsizing or selling their homes to make ends meet.
In this regard, equity release is becoming an increasingly attractive way for them to remain living at home after payments stop during retirement without having to sell up.
Risks of Equity Release
Main Article: Equity Release Pitfalls
The main risk with equity release is that it can be very expensive to repay the loan. You have to pay interest on top of capital and fees, which could mean repaying more money than originally borrowed.
It’s also worth bearing in mind that the FCA-Regulated Equity Release Adviser regulates not all providers, so some offer much worse deals than others, for instance, charging high exit penalties if your circumstances change.
Due to this, there may be a danger that people will pay far more than they planned or were told about buying their property.
Equity release relies on maintaining an adequate income during retirement, those who don’t have any other assets such as savings will find themselves trapped within a cycle of debt. The disadvantages of equity release for those with no other assets such as savings can become a trap of debt.
Are There Any Other Forms of Equity Release?
Yes, there are other forms of equity release, including shared ownership schemes and a Lifetime mortgage.
Some providers offer what is known as Shared Ownership Schemes, whereby you can purchase a share in your property – usually between 25% to 75%.
This allows for greater flexibility because it means that you could sell the share at any point without incurring exit penalties (although this may result in losing some or all of your initial investment). The benefit of this type of equity is that they enable people with limited savings to buy their own home but still have access to more funds if necessary, such as when grandchildren come along who need somewhere to live whilst studying.
Another form available is called a lifetime mortgage plan. Instead of borrowing against an asset like the property, the retirement income from an insurance policy is used to pay off the capital.
On the other hand,
The downside of equity release schemes is that they can be expensive. So you need to think carefully about what will happen with your home if there’s a problem later on.
You should also remember that these plans rely on accurate financial projections, which may not always turn out as expected.
If anything goes wrong, it could leave people in very difficult situations, especially those who don’t have any other means of support or money set aside for their retirement years.
What Safeguards Are There for Equity Release Plans?
People who take out equity release plans are protected by the Financial Conduct Authority (FCA), the financial regulator responsible for regulating all financial services providers in the UK. The FCA has several rules and regulations that must be followed to protect consumers, including:
Let’s take a closer look:
- Providers should state clearly what their charges will be at an early stage – before any money is exchanged or set up;
- Consumers should always read terms and conditions carefully before signing anything;
- If you’re not happy with any part of your agreement, then it’s possible to cancel within 30 days without having to pay cancellation fees;
- There are also some things about Equity Release Plans that people might not know until it’s too late. Hence, it’s important to be aware of the following:
- You have no choice over your future mortgage repayments – they will always remain constant to protect that equity;
- Equity Release Plans offer an instant cash lump-sum payment and are not cheap. Interest rates can range from 13% up to as much as 24%;
- There is a risk you could lose some or all of your capital if, for example, interest rates go higher than expected and/or house prices fall below what they were when the plan was set up. It’s worth considering that these factors may affect how long it takes before you’re able to sell again – which might lead to losses on top of any negative equity;
Equity release can be a great way to live the retirement you dreamed of. If you have equity in your home, giving up some or all of it using an equity release strategy may allow for more comfort and security than what is available through other avenues like saving money while working, Social Security, pensions, and annuities.
But before making any financial decision about releasing equity from your property with these products, make sure that they’re right for you by seeking out qualified expert help.