If you are a homeowner aged 55 and over, equity release can seem like the perfect way to free up some of the value in your home. But whether you’re dreaming of a round-the-world cruise or a holiday home in sunny Spain, equity release schemes need approaching with caution. They can be extremely expensive, confusing and inflexible; and you can end up paying back a lot more than you might expect. They can also affect your entitlement to benefits.
What is equity release?
Equity release schemes allow you to either borrow money and secure it against your home (a lifetime mortgage) or sell all or part of your home in exchange for a lump sum or regular income (a home reversion scheme).
If you have paid off most or all of your mortgage, it’s a way for you to free up some money, allowing you to do more of the things that you’d like to in your retirement. There is usually a minimum amount that you must take, such as £15,000, although you might not need to take all of this at once.
Equity release schemes have become extremely popular, with some £3.8m being paid out every day in equity release products.
When equity release goes wrong
Although equity release might sound like a fantastic idea in theory, it is not suitable for everyone and in some cases; the loan can quickly become a huge burden. In 2001 one homeowner took out an £81,000 lifetime mortgage with Norwich Union (now Aviva) and was horrified to discover that by December 2014, the sum had escalated to a shocking £294,141 debt. This comprised of the initial £81,000 plus £149,244 interest, a staggering £63,787 early repayment fee and a £110 administration charge.
Although she took her loan before the industry became regulated, the sums she was liable for are still fairly typical. The amount you owe will generally double every ten years, so if you take £50,000 at the age of 65, you could find yourself owing as much as £200,000 by the time you are 85.
Since April 2014 the equity release market has been subject to regulation. Any firm that sells equity release products is obliged to give you advice. They must ensure that equity release is right for your needs and circumstances and recommend only those products which meet your needs. Since some lifetime mortgages require payment of interest on the loan and sometimes the capital too, providers are also required to check you can afford the repayments which includes reviewing evidence of your income and expenditure.
Equity release firms must also ensure that their adverts and sales material is clear and not misleading. The product information should display the pros and cons of each scheme clearly, showing the APR for lifetime mortgages and the fees involved in the scheme. Advisors must also check if using the scheme will affect your entitlement to benefits or impact your tax bill. A key facts document must also be provided which includes clear information – for example, covering the overall cost of the scheme and what happens if your want to leave it early.
The effect of regulation has not changed the large sums for which those who choose equity release can become liable. The main difference is that those considering an equity release scheme should receive better information before committing to the product.
How to avoid being stung
If equity release sounds like an appealing prospect, it’s worth paying for independent financial advice to find out if it is really the best option for you. Despite the increased regulation, it remains true that any advice you receive from a particular seller is going to be biased towards their products and there may be better offers or products on the market for you.
An independent advisor can help you review the fees and charges of different schemes and ensure that you are fully informed about what you will have to pay back, including what would happen if you want to settle the debt early or exit the scheme. They can also help you find a lender who is a member of the Equity Release Council (ERC). If a firm subscribes to the ERC code of conduct, you can be confident that you will not owe more than the value of your home, and you will not pass your debt on to your family.