A guide to whether equity release is the right move
Pete Mugleston is managing director of Online Mortgage Advisor
For a long time, equity release has had a reputation as a risky financial decision, or at least as a last resort for those who need to access cash. The truth of the matter though is that equity release plans are in fact a very effective way of gaining access to money tied up within the value of people’s homes. They are designed to help someone who is approaching, or may have already reached, retirement and finds themselves debt-free, rich in fixed assets (such as property) but relatively cash poor.
Retirement can be a daunting thought, especially with increasing living costs and the prospect of having less income to do all the things people want to do whilst working. Many retirees find that as the cost of living increases, pensions and saving rates often fail to provide the returns that they need to get by.
With no requirement for regular repayments, equity release plans are particularly attractive to those on low pension incomes. Rather than repay the money during a fixed term all the interest rolls up on top of the original amount borrowed and then is repaid, either when the person dies or moves into a care home.
It is important to note that regulation from the Equity Release Council now provides better access to advice and protects against the most common concerns many people had – equity release is now a lifetime mortgage, not a home reversion which alters the ownership status. We should champion greater choice and flexibility for homeowners over what to do with their own money, just as the government has done with access to pension pots.
Generation X, approaching or into their 50s may be starting to think about finding the money to enjoy their retirement and whilst downsizing might be the best option, this can often be seen as a compromise. Facilitating stamp duty payments or finding a competitive mortgage for the 55+ year old no longer in full-time employment can be challenging without the right advice. For this growing segment of the population, equity release therefore can be the best solution.
For the over-55s there are a wide range of lenders who are specialists and regulated by the FCA, opted-in with the Equity Release Council. It is crucial to connect borrowers with the right broker for this specialist area, to avoid the pitfalls of unauthorised lenders and unnecessarily high rates.
Over the last few years, we’ve seen an increasing number of retirees contact Online Mortgage Advisor and ask if equity release is a viable way to raise funds. Of course, equity release can help, but it’s a big commitment, and not one to be taken lightly.
As we’ve mentioned, equity release may well be a good option for many. Firstly, it’s easy to access: as many equity release retirement schemes don’t require repayments and credit history is not such a factor – making equity release arrangements easier to get than some of the alternatives. With ‘drawdown’ type schemes, people can choose to withdraw only as much as they need – only paying interest on what they have taken out.
Releasing equity does incur interest, but it doesn’t incur tax. There are no repayments and people don’t have to make them unless they want to. A common misconception is that people think that they may lose their home but the agreement they make means they stay in their home as long as they need it – it is then only sold when they pass on or move into care. A plus-side is also the ‘no negative equity guarantee’ which ensures that their next of kin doesn’t inherit debts. They can also ‘ring-fence’ a part of their estate, ensuring that whatever happens – there’ll always be something to pass on.
No decision should be taken lightly, as with everything there are of course some downsides to equity release, that may not suit everyone. One main thing to watch out for is the interest incurred on the loan – as we’ve already mentioned there’s no danger of losing a home, however the costs incurred on the loan does compound and people aren’t simply able to leave the house to their loved ones after they’re gone. When they do die, the house has to be sold to pay the debt – what is left then goes to their heirs.
Another big question – does equity release affect State Pension? The answer is no as a State Pension is not a benefit. Pension Credi, however is a means-tested benefit so can be affected, but not the basic State Pension.
If people are considering equity release as an option, it is crucial to ensure that they are dealing with responsible lenders and that they’re guaranteed the ‘right to tenure’ in their home for as long as they need the house. The most important thing for people to do is seek the right advice and ensure that they have all of the facts.