The risks of equity release

What are the risks of equity release plans?

Equity release has helped thousands of homeowners achieve their later life financial goals. But as with any financial product, there are some drawbacks to weigh up against the financial benefits that equity release can bring.

To help you understand the risks of equity release, we’ll be covering the following in this guide:

• How does equity release work?
• Compound interest can grow quickly
• Equity release may impact your benefits
• Does equity release risk your children’s inheritance?
• What are the risks of equity release and early exit fees?
• Moving home with equity release
• Your circumstances may change
• Restrictions on other loans after equity release
• Provider going into liquidation

If after reading the following information you want to know more about the risks of equity release, please do get in touch.

Our selected advisers are available to discuss your circumstances and offer further information. Just call us on 0800 096 or request a call back and we’ll arrange a no-obligation appointment for you.

How does equity release work?

Before we get into the potential risks of equity release, it’s worth understanding how a plan works. Equity release is a financial product aimed at later life homeowners who want to unlock some of their property wealth without having to make any monthly repayments. The money you unlock can be spent however you wish, providing any outstanding mortgage is repaid first.

The most popular form of equity release is a lifetime mortgage and is available to homeowners over 55. After releasing a percentage of your home’s value, you’ll still retain full ownership of your property. The loan plus interest is typically paid back through the sale of your home when you pass away or move into permanent long term care.

Want to know how much you could unlock from your home? Check your eligibility and get your free quote now!

Compound interest can grow quickly

The first risk of equity release we’ll look at is the way that interest accrues on your plan. 

The reason you don’t have to make any monthly repayments on your lifetime mortgage (unless you choose to) is because the interest on your loan rolls up each month and is paid back when you pass away or move into long term care.

The interest on a lifetime mortgage is known as compound interest. It’s where interest due is added to the mortgage account, and interest is then charged on the loan amount PLUS the accrued interest. This means that the total amount owed can grow quickly, making equity release an expensive way to borrow money compared to other options. 

However, there are ways that you can reduce or even prevent the effect of interest on your loan, such as an interest-only lifetime mortgage. With these plans, you agree to make interest payments each month. If you pay the full interest and keep up with the payments, you avoid the cost of compound interest. All that needs to be repaid when the house is sold at the end of the plan is the loan itself. 

Alternatively, all plans with the Equity Release Council seal of approval allow customers to make voluntary partial repayments each year without penalty. This will reduce the impact of compound interest. How much you can repay depends on your chosen lender, but some let you repay up to 10% of your overall loan without penalty.

Equity release may impact your benefits

If you currently receive financial support from the government, be aware that equity release may affect your entitlement to some state benefits. This can include Universal Credit and Pension Credit. 

In addition, if you are receiving homecare fully or partially funded by your local council, then your eligibility may be affected, or you may have to pay more towards it.

The reason for this is the money you receive from your equity release plan may count towards your income or savings if a check or review of your means-tested benefits entitlement is carried out. This may mean you no longer qualify for means-tested financial support.

If you are thinking about equity release then do get a full benefits check first. So many people in and approaching retirement are missing out on benefits that they’re entitled to. You may even find that you do not need the extra money from equity release once you are claiming everything you should be.

Make sure you seek advice to ensure you do not risk missing out on any financial support that you rely on. You can talk to Citizens Advice or the appropriate government agencies to help assess whether releasing equity might affect your entitlement to benefits.

Does equity release risk your children’s inheritance?

An equity release plan may reduce the value of your estate as you are borrowing a cash lump sum from the value of your home. As your estate will have to repay this loan plus interest from the sale of your home, there will likely be less to leave as an inheritance for your family, friends or charity.

To minimise the risk of equity release affecting the inheritance you leave, you could:

• Arrange an interest-only lifetime mortgage. This will prevent the loan from getting any bigger, as long as you keep up with repayments. 
• Make ad hoc partial repayments on a standard lifetime mortgage. These are penalty-free up to a certain amount each year depending on which lender you choose.
• Select an inheritance protection guarantee to ringfence a percentage of your home’s value as an inheritance for your loved ones.

If the issue of inheritance is important to you, you can read more about equity release and inheritance here. 

What are the risks of equity release and early exit fees?

As equity release is typically a lifetime commitment, you may incur hefty equity release early repayment charges (ERCs) if you choose to end the plan early. Please see our article ‘Can you pay back equity release early?’ for more details.

Some ERCs are up to 25% of the overall loan amount, though they are usually much less than that. For instance, Aviva’s fixed term charges are just 5% of your overall loan after six years, falling to 1% after ten years. After 15 years there are no ERCs to pay at all. 

However, there are multiple scenarios where you may be able to make your repayment/s without incurring any penalties. 

You or your estate will typically be exempt from paying any ERCs if:

• The repayment is after your death or the death of the remaining borrower.
• You or the remaining borrower move into long-term care.
• The fixed early repayment charge term has expired.
• You are selling your property and transferring the mortgage to another suitable property with your lender’s permission.
• You have a ‘Significant Life Event Exemption’ feature on your plan. For example, this may allow you to repay your loan without penalty within three years of your partner passing away or moving into long-term care.
• You have ‘Downsizing Protection’ on your plan. This may for example give you the freedom to downsize your home and repay your loan in full after having your plan for five years 

Charges can be considerable, so to minimise this particular risk of equity release, make sure you seek advice from an equity release specialist before committing to a plan.

Hidden equity release fees

As with regular mortgages, there are fees that will apply at various stages of the process which you will need to consider and plan for. 

To avoid being hit with hidden equity release fees, be sure to select an equity release adviser who is honest and transparent from the outset about the fees you will incur.

Equity release fees you can usually expect include:

• Advice fees: Some equity release advisers charge a direct fee for the advice they give you. At Equity Release Wise, all the initial advice you receive from our selected advisers is free of charge. Only if you go ahead with a plan will you receive a fee for advice, which can be paid on completion from the money you release.
• Arrangement fees: Also known as an application fee, this is charged by the provider to cover administration costs, though not all plans include them. You may also have to pay a fee for them to transfer your money to your solicitor on completion. 
• Solicitors’ fees: As with a conventional mortgage, once you accept your loan offer, you will need to choose an equity release solicitor to carry out the legal side of things on your behalf. Equity release solicitor fees are typically between £650 – £800 including VAT. 

Moving home with equity release

If your needs change in the future, you may decide to downsize or move closer to family. But some people worry that equity release risks their freedom to move house again.

By choosing a provider on the Equity Release Council panel, you will then have the right to move house, subject to the new property being acceptable to your product provider. 

Do bear in mind that if you move to a lower-value property, you will probably have to repay part of your equity release loan from the proceeds of selling your current home. And if your provider does not deem your new property suitable, you will have to repay your loan early, which may involve significant early repayment charges.

Your circumstances may change

If you jointly arrange equity release and divorce or separate in the future, you may find you have little equity left over to buy a new home after repaying your loan plus interest and any early repayment charges. Whilst a difficult topic to consider, you may wish to think carefully if this could be an issue for you one day.

Or, you might begin a long-term relationship after arranging your plan. If you marry, enter into a civil partnership, or ask your partner to move in, you may find that you are unable to add them to your plan.

This means they will not have the right to live there after you pass away or move into long-term care. Instead, your property will be sold to pay off the lifetime mortgage or home reversion, potentially leaving them without a home. 

If you do live alone and choose to take in a new partner, companion or a live-in carer, they will have to sign an ‘occupancy waiver’ which releases their rights to the property. Legal advice should be sought by them before doing so, to ensure the agreement is fully understood.

Provider going into liquidation

Equity release horror stories still abound from decades ago, when a few unscrupulous equity release firms went bust after arranging huge loans with customers. While it’s true that with any form of borrowing there is a risk of your chosen lender going bust, equity release customers benefit from a raft of strict protections.

In addition to formal Government regulations, the industry’s regulatory body The Equity Release Council (ERC) ensures its members follow a strict set of industry standards. Discussing this potential risk of equity release, the ERC states: 

“If a firm exited the market, steps would be taken to protect its existing customers’ interests. There have been examples where companies have stopped writing new business or left the market and another provider or third party has assumed responsibility for its customers. Alternatively a firm may cease to provide new lending but continue to provide services to its existing customers.”

Choosing a regulated provider on the Equity Release Council’s panel will give you extra protections and minimise any risks of equity release.

For instance, there can be no change to your contract’s terms following a firm’s liquidation. This includes the interest rate you sign up to, the No Negative Equity Guarantee, and the right to remain in your home for life or until you need to move into long-term care.

Restrictions on other loans after equity release

If you arrange an equity release plan then you will not be able to secure any other loans against your property in the future. This includes standard mortgages, retirement interest-only mortgages and second-charge mortgages. 

However, if you need further funds in the future then your provider may approve you to unlock more equity with a further advance after a certain period of time. 

Alternatively, you can speak to an equity release adviser about applying for a new plan with a new provider. In addition to repaying your old plan, you could potentially unlock more money due to being older or qualifying for enhanced terms due to your health or lifestyle.

If you might want to access further funds in the future then arranging a drawdown plan might work well for you. This gives you a maximum facility that you can tap into, releasing your money in stages as and when you need it. You can read more about drawdown equity release plans here.

Speak to an equity release specialist today

Releasing some of your home’s value is one of the biggest financial decisions a homeowner can make and usually a lifetime commitment. A plan should typically be chosen only after considering all other alternatives to equity release first.

If you have any questions about the risks of equity release, or you are thinking about arranging a plan then do make sure you speak to us. 

Our selected advisers are highly trained specialists who can provide you with all the information you need to make the right decision for you. You’ll never be under any pressure or obligation to proceed by using our service.

Speak to our friendly team today on  0800 096 2215. They can connect you to one of our carefully selected advisers who can answer all your questions and check your eligibility for a plan. Alternatively, request a free call back here.