There’s no doubt that these types of schemes, also known as lifetime mortgages are big business, especially amongst retirees looking to enhance their pension pot, make home improvements or use as a gift for family. But with so much money and of course your property at stake, is equity release safe or is it something you should avoid at all costs?
What is equity release?
Releasing equity from your home gives you a tax free way to use and enjoy the money that is locked up in your property. There are no monthly loan repayments as the amount owed is paid back either once you have died or moved into care and the property is sold.
The equity is the value of your property minus any loan or mortgage you have against it; so for example if you have a property worth £250,00 with a £20,000 mortgage left outstanding, the equity would be £230,000.
So this type of loan against your house gives you the chance to use some of that money in a way that suits you; be it improvements to your home or garden, the luxury holiday you’ve always dreamed of, assisting with the cost of retirement or perhaps helping family get a foot on the property ladder.
What are the pitfalls?
Although there is no catch as such with a lifetime mortgage, you do need to be aware of the implications and how they can affect your family. You are not required to make monthly repayments for your equity loan, therefore the money owed is repaid once you have either died or moved into a home and the property is sold. Therefore lifetime mortgage interest rates are much higher than normal mortgage interest rates.
This in turn will impact any inheritance you leave your family, as your equity loan will need to be repaid when your estate is administered.
Also the cash sum you get may affect any benefits you may be receiving like pension credits and council tax reduction but your IFA should be able to look into this for you before you agree to put a lifetime mortgage in place.
Is releasing equity from your home safe?
Due to bad practice in the 1980’s and early 1990’s when some unscrupulous lenders arranged expensive deals resulting in people owing more than the value of their home, lifetime mortgages quite rightly got a bad name. I’m pleased to say however in our new tightly regulated Financial Conduct Authority age, things have changed drastically and lifetime mortgages are increasingly being seen for some as a valuable tool for aiding retirement.
Now the lifetime mortgage market is regulated by the Financial Conduct Authority (FCA) and most companies are signed up to the Equity Release Council, which is a trade body that sets the standards for equity release schemes.
As part of these standards, the Council stipulates that:
- Interest rates must be fixed or if variable, there must be an upper limited or cap that is fixed for the lifetime of the loan
- You must be able to stay in the property for life or until you move into care, just so long as you abide by the terms and conditions of your lifetime loan
- You have the right to move to another property as long as your provider is happy that the new property offers continued security on your equity loan.
- The lifetime mortgage must come with the all important ‘No negative equity’ guarantee which means that when the property is sold and solicitors and agents fees have been taken into account, if the amount left is not enough to pay the outstanding loan, neither you or your estate will be liable to pay any more.
In addition to these product standards, for your security the Council also provide strict rules and guidance on the sales process and stipulate that you can only take out an equity release loan if you receive professional financial advice and independent legal advice.
Is Equity Release right for me?
So is equity release safe and should you consider unlocking the hard earned cash from your home as part of your retirement plan – well the answer is yes just as long as you:
- Seek independent advice which will help you understand whether the is a better option for you other than a lifetime mortgage
- Ensure your chosen company is a member of the Equity Release Council and therefore abides by the all important ‘No Negative Equity’ rule
If you want to understand a little more about how much money you could release from your home, take a look at our simple equity release calculator provided by independent specialist Age Partnership. The key thing about Age Partnership is that this award winning company actually compare the whole of the equity mortgage market and have preferential rates in place too.
And on a final note, in addition to taking a look at the equity mortgage calculator, it is also important to talk to your family, as choosing this type of scheme could affect them too.