What’s the catch with equity release?

Over the years, equity release has had its fair share of bad publicity, not helped by the Coronation Street plotline where evil Richard Hillman conned people into joining his dodgy schemes. So it makes sense to approach it with a healthy scepticism and ask, "What’s the catch with equity release?".

The good news is times have changed. Equity release is now thought to be one of the most strictly regulated financial services. Today’s lifetime mortgages and home reversion plans are bound by Financial Conduct Authority rules, and all reputable providers are members of the Equity Release Council and comply with its principles.

The reality is releasing equity may be a great way to raise the cash you need, but it will depend on your personal circumstances, so always seek independent professional advice before deciding if equity release is a good idea for you.

5 potential disadvantages of equity release

Here we outline five potential ‘catches’ for you to consider alongside the benefits that come with releasing equity from your home.

Equity release catch 1:

Lifetime mortgage interest rates tend to be higher

A lifetime mortgage works differently to standard mortgages. With a standard mortgage, you usually make monthly payments over a set period. But with a lifetime mortgage, the money you borrow, and the total interest are usually only repaid when you die or go into long-term care.

As a result, lifetime mortgage interest rates tend to be higher. In 2020 rates were typically between 4-6% AER, although you might be able to find a lower rate if you look around.

What are your options?

Speak to an independent adviser. They can search the whole market to find the most appropriate equity release plan for you, at the best rate. Our chosen independent experts Age Partnership have negotiated preferential rates with leading lenders you may not find anywhere else.

Equity release catch 2:

The amount owed can go up quickly

The interest rate on a lifetime mortgage is usually fixed, however, it is 'compound' interest. This means that it is charged on the total amount of the loan each year, including all the interest that has already built up. So every year you are charged interest on a larger and larger sum, which can dramatically increase the total amount owed.

The longer your lifetime mortgage lasts, the longer interest charges can continue to build up. In some cases, at the end of the plan, you or your family could end up owing the whole value of your home to the equity release company

What are your options?

Many equity release providers now offer lifetime mortgages with an option to make voluntary repayments – either monthly or on a flexible ad-hoc basis. This can help to lessen the impact of compound interest.

Also, always make sure your provider is a member of the Equity Release Council. Then your lifetime mortgage will include a “no negative equity guarantee”, meaning you can never owe more than the value of your property.

Equity release catch 3:

The value of your estate is reduced

When you release equity from your home, you will receive a lump sum, regular cash payments or a cash reserve to draw on when needed. In exchange, you agree that the equity release provider will be repaid when you die or move into long-term care. This will probably mean selling your home, so your family will not be able to inherit it – although they will receive any money left over after the sale

What are your options?

Look for a lifetime mortgage that includes an inheritance protection guarantee. This will let you 'ring-fence' a percentage of your home's value, to ensure it is passed on to your chosen heirs.

Equity release catch 4:

Repaying a lifetime mortgage early can be costly

As its name makes clear, a lifetime mortgage is a lifelong commitment. If for some reason you decide to pay off your mortgage early, you could be faced with an early repayment charge, which could be high.

What are your options?

Give careful thought to how and when you’d like to repay your lifetime mortgage. If paying back some or all of the loan as you go is important to you, consider a lifetime mortgage with the option to make penalty-free voluntary repayments, either on an ad hoc or regular basis.

Equity release catch 5

Your entitlement to state benefits may be affected

If you're receiving a state pension or universal credit, your benefits may be affected when you release equity from your home, as it will increase your income.

On the other hand, your current credit score won't affect your eligibility for equity release – the amount of tax-free cash you can release simply depends on your age and the value of your property.

What are your options?

Ask the Department of Work and Pensions, or Citizens Advice how releasing equity might affect your state pension or entitlement to benefits. Or ask our Age Partnership advisers who are qualified to advise you on this.

Don’t get caught out.  Speak to an independent expert

It’s important to seek professional advice before deciding whether equity release is right for you. It's best to consult an equity release qualified IFA or an independent broker, such as award-winning equity release specialists Age Partnership, our carefully chosen partner.

Age Partnership will compare equity release plans and providers from across the market, giving you a much broader view of the best and most suitable solutions for your unique circumstances.

Book a free, no-obligation initial consultation or try our free and easy to use calculator to find out how much equity you could release.

Updated 15th January 2021
by Ashley Shepherd
Ashley Shepherd

Ashley is the founder and managing director at Over50choices. With over 30 years’ experience in financial services, he has held senior roles in building societies, banks and insurance companies.

We know it's a big decision!

That's why we have teamed up with Age Partnership one of the UK's leading equity release specialists.

Find out how much cash you could release by clicking on the button below.

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