Equity release, no doubt, is a long-term commitment, and many in the United Kingdom (UK) are worried about choosing the right provider. Choosing a company without adequate knowledge can leave you tied up in a plan that’s not the right fit for you.
With the regulations imposed by the Financial Conduct Authority (FCA), releasing equity has never been safer. However, you still have to do your due diligence before choosing a provider. There are various things like company reputation, equity release scheme, and eligibility that you need to consider before making a decision.
In this article, we’ll focus on developing an in-depth understanding of equity release. Then, we’ll dive deep into which equity release companies you should avoid.
What is an equity release?
Equity release is a financing option secured against the value of your home. Knowing that the financing option is only available to those 55 or older is important. Equity release plans in the UK can be availed regardless of whether you’re on a mortgage or not.
These plans allow you to unlock tax-free equity from your estates. In addition, you can continue living in your house after having equity released and don’t have to make monthly repayments. However, the amount of equity you can release depends on your age and the value of your estate.
What is an equity release company?
An equity release company is a lender offering different types of equity release products. Common lenders that offer equity release plans include later-life mortgage providers, banks, and building societies. If you are arranging an equity release plan, you should know that the best providers are a part of the Equity Release Council.
Members of the equity release council aim to promote high standards of practice and ensure that customers have confidence in the equity-release products that companies offer. An equity release company allows individuals to receive their money as a lump sum amount or as a series of smaller payments. However, the equity release product they select can influence this decision.
How does equity release work?
When you go to a lender, they will calculate the value of your estate to determine how much they can borrow. You can leave out a certain amount from these calculations as an inheritance for your family. In addition, some equity lenders may offer you a no-negative equity guarantee.
As mentioned, you're allowed to live in your house after releasing equity for as long as you live, until you’re moved into a long-term care facility, or decide in favour of downsizing. When the property is sold, the borrower uses the sale proceeds to repay the lender. This is when the "no negative equity guarantee" becomes applicable.
Property values are always fluctuating, and it could be possible that your house is not worth the amount you borrowed anymore. In such cases, a no negative equity guarantee ensures that the remaining loan amount would be written off.
What are the different types of equity release?
Equity releases can be divided into two main types: a lifetime mortgage and a home reversion plan. In a home reversion scheme, an equity release provider may choose to purchase 25% to 100% of your house. After the purchase, you’ll receive a lump sum payment and can continue to live in your house.
Lifetime mortgage plans, on the other hand, are a bit different. These plans are tailored to run throughout your life, and your property remains 100% yours. When homeowners choose a lifetime mortgage equity release scheme, they must decide whether to receive a lump sum payment or a series of smaller payments. These equity release plans are further divided into five types. Let’s look at them in detail.
Flexible lifetime mortgage
This type of mortgage allows you to collect payments without paying interest. However, the amount of interest you don’t pay is added to your equity release loan. This means the total amount you owe can increase rapidly. So, if you don’t want to make monthly interest payments, this can be a great option for you.
Optional payment lifetime mortgage
You can choose to receive your money as a lump sum amount or a series of small payments. However, the only difference here is that some or all of the monthly interest on the loan is paid. This can help you reduce, or even eliminate, the overall interest amount on your loan bit by bit.
Income lifetime mortgage
The income mortgage options only allow you to take small payments for a fixed period. If you opt for this option, you need to know that these payments can be combined with a small lump sum payment to boost your cash flow. This can be a good option if you’re looking for a regular income stream.
Enhanced lifetime mortgage
This mortgage option allows you to access more equity, and that too at a lower interest rate. Most people often get confused about why other options should be considered if these mortgages offer more equity. In an enhanced lifetime mortgage, your lender does want you to have more value. However, these options may be limited to individuals experiencing health challenges.
Retirement interest only mortgage
This type of mortgage works similarly to a standard interest-only mortgage. If you choose this type of equity release mortgage, you’ll have to make monthly interest payments. The interest rate will be agreed upon before you start receiving any payments. However, some equity release lenders may offer a fixed interest rate for life or only for a certain period.
When you draw down an equity release plan, it’s important to see financial advice. A financial adviser can help make an informed decision. Their financial services can help you secure tax-free cash, lower interest, and assets to be passed down to your beneficiaries and family members.
How does equity release interest work?
An equity release is a loan you take, and like all loans, it comes with interest. So, you’ll have to pay a little extra on the money you receive each month or your total cash lump sum.
Paying the interest on time will help keep your total loan amount as low as possible. Whether you make regular payments monthly or annual interest payments will depend on your chosen financial product. If you are considering an equity release, you need to know that interest rates on most plans are generally fixed.
This means you’ll always be charged the same amount, regardless of general interest rate hikes. However, some plans come with variable rates. Initially, a variable rate might be lower than fixed rates, but they tend to increase over time. Equity release interest rates are influenced by several factors that may include:
- The total amount of money you’re borrowing
- The possibility of your house’s value increasing or decreasing over time
- Special features are being added to your equity release plan
A few things you can do to reduce the interest include:
- Paying off your mortgage as much as possible before applying for an equity release so you may be offered a lower interest rate
- Releasing the lowest value of equity on your house so that you avoid high-interest rates that absurd amounts attract
- Limiting the number of special features added to your equity release scheme to avoid additional costs
- Doing a little research to determine the future valuation of your house
- Increasing the value of your house by ensuring proper renovation and home improvements
What are the advantages and disadvantages of equity release?
The idea of getting money that equals your home's value while living in your main residence is convincing for many people. However, this doesn’t necessarily mean that equity releases don’t have a downside. Let’s look at the pros and cons in more detail.
Pros of equity release
Equity release can undoubtedly add financial ease to those later in life. Some advantages an equity release has to offer include the following:
- Equity releases like lifetime mortgages allow you different options for accessing your money. You can receive a lump-sum payment, a series of smaller payments spread, or a combination of both.
- When you take an equity release, you can ensure you’ll owe more than your house is worth. The no negative equity guarantee ensures that the remaining loan amount would be written off if your home were to decrease in value when sold.
- Some equity release plans also allow you to safeguard a certain amount of money for your loved ones. This means that you can not add financial ease to your life but leave an inheritance for your family members.
Cons of equity release
As mentioned, equity release does have its downside. It's easy to overlook these drawbacks often. Some disadvantages include:
- An equity release plan is designed to last for the rest of your life. However, there may be cases where you can pay the loan. In such circumstances, you’ll likely incur early repayment changes.
- Repayments made to an equity lender are charged interest rates. These rates can be fixed, variable-based or compound interest. Regardless of the case, these rates will drive up the amount of your repayments and can increase if you have an existing mortgage or an outstanding mortgage.
- After releasing equity on your house, you can continue living in it. However, in some cases, you may need permission from your equity release lender to renovate your house.
What are some factors to consider before choosing an equity release provider?
Choosing an equity release provider can be challenging. There are several things that you need to consider. Not paying attention to these factors can leave you tied up with an ineffective equity release provider or a plan that’s not right for you. So, some of the things that you need to consider before choosing an equity release provider include:
Your personal circumstances play a huge role in the type of equity provider you choose. For instance, some providers may only offer a home reversion plan, and you might seek a flexible lifetime mortgage. The provider won’t be a good fit for you in such cases. So, you must assess your circumstances and determine your needs before choosing an equity release provider.
Equity release products
When choosing an equity release lender, it’s important to consider the number of options you can offer. Multiple options give greater control over your money, how you receive, how much you choose to leave as an inheritance and more. Generally, it’s better to opt for a provider with multiple options than one that’s limited.
Equity release fees
Equity release advice given by an expert is invaluable and oftentimes the best course of action when choosing a plan. However, it’s important to know that an equity release adviser often charges an advice fee. As someone seeking equity release, consider these arrangement fees before exploring your options.
The option to switch
Even after your due diligence, you may still find that the equity release plan you choose is right for you. To cater to these factors, you must ensure that your provider can help you switch plans seamlessly with keeping the expense roll-up to a minimum.
Reputation and service quality
You must also consider the reputation and service quality of your potential equity release provider. Be sure to choose a provider with a positive reputation in the market and among customers. Reading reviews online or talking to those who’ve worked the equity release lenders can help you determine their service quality and reputation.
Which equity release companies should you avoid?
Choosing an equity release company that is not the right fit for you can be daunting. In addition, you also want to ensure that you only work with equity release companies that are members of the equity release council.
It’s important to note that equity release companies have had a bit of a sketchy reputation in the past. There have been companies that have taken advantage of the elderly, offering them shady plans with high-interest rates.
However, to stay clear of these things, you must ensure the equity release provider you’re planning for is registered with and regulated by the FCA. In addition, you should also avoid equity release companies that:
- Do not offer a no negative equity guarantee. If the company it’s offering this, it means that the debt is not capped at the sale value of your house.
- Do not offer a fixed interest rate. If that interest rate isn’t fixed, you could end up owing more than expected.
- Do not allow you to stay in your house. Remember, with an equity release, you have the right to live in your house for the rest of your life, until you’re moved to long-term care, or until you buy a new home or property to live in.
- Do not access your personal circumstances before giving you an equity release. If a provider hasn’t assessed your personal situation, they can’t find plans that best fit you.
- Do not have low early repayment changes. Should your circumstances change and you can pay off that loan in your lifetime, you need to ensure that the early repayment charges are minimal.
While equity release providers often have a bad reputation, their TrustPilot ratings highlight that most people are satisfied with the service they receive. However, if you visit the links below, you can see what customers who weren't happy with these companies were saying.
- My Equity Release Expert - they provide independent equity release advice. However, some people have complained about their spammy advertising, cash-back issues, and lack of professionalism.
- More2life - this is another specialised equity release provider that helps people secure later-life mortgages. However, some people have complained about their overall services.
- Pure Retirement Ltd - they are a well-known equity release provider. However, they have a few complaints about not responding to customers.
Releasing equity is a big step, so if you’re considering taking out an equity release product, you should seek professional financial advice. It is very important to thoroughly check the legitimacy of a business before proceeding with any transactions or engagements, so make sure you do your research before choosing the equity release company that’s right for you.