What do we think about Martin’s suggestions for people considering equity release?
Martin Lewis has provided information on a number of issues for anyone thinking of taking out an equity release plan. Here’s a summary of what he said on the three TV appearances we’ve covered above, along with our thoughts on the points he covered:
H3: Look at alternatives first
Martin often mentions downsizing as an alternative to equity release, which is where you sell your home and move to a smaller one, or one in a less expensive area.
Other alternatives to equity release to consider may include getting help from family members, taking in a lodger or remortgaging. See our article on alternatives to equity release for more information.
We completely agree that everyone taking out equity release should consider alternative ways to raise money first. Equity release can be an excellent way to raise the money you need, but unless you pay off the interest each month with an interest-only lifetime mortgage, it is an expensive way to borrow.
Our selected advisers will always discuss alternatives with you. If they think there is a better alternative to equity release, they will always tell you.
Release as little as possible
Martin urges people to access only what they need through equity release. We certainly agree that you should think carefully about how much money you need and why you need it before entering into an equity release plan.
The cost of a lifetime mortgage and the compound interest that accrues may not be a major concern if you aren’t worried about how big an inheritance you leave. But if leaving an inheritance is important to you, remember that the less you release, the smaller the build-up of interest.
Do it as late as possible
Martin’s comments here once again relate to the way that interest builds up on a lifetime mortgage. The older you are when you take out a plan, the less time it will run before you pass away or move into long-term care. Therefore, less interest will typically build up than if you were to take the money sooner.
This is of course true, and releasing equity as late as possible will reduce the cost. We would however point out that some people who are ‘cash poor, asset rich’ might need the money now and therefore may not feel able to wait to release equity.
A retirement income report from the Pensions Policy Institute illustrates the fact that many people in later life are short of money when it says that: “Millions of people in their 50s and 60s are running out of time to prepare financially for retirement.”
If you need the money now, and have exhausted other alternatives, you may decide that taking out an equity release plan may be the only realistic way to access cash you need without having to sell up and move.
Consider a drawdown lifetime mortgage
Martin has mentioned that a drawdown lifetime mortgage is a way to reduce the cost of equity release. However, there’s more to what he said in his 2021 This Morning appearance.
He said that with a drawdown lifetime mortgage: “You don’t have to take as much and you can pay some of it off.”
Let’s break that sentence down into its two parts:
“You don’t have to take as much.” Martin was correct when he indicated that a drawdown lifetime mortgage can be a way to reduce the cost of equity release. That’s because you take your tax-free cash in stages and only start paying interest on each instalment as and when you withdraw it.
“You can pay some of it off.” This is accurate, but it’s not just drawdown plans that allow you to pay off some of your loan without incurring penalty charges. A lump sum lifetime mortgage will also let you pay off some of your loan penalty-free: this option isn’t exclusive to drawdown plans.
Paying off some of your loan early can reduce the amount of interest that accrues, and therefore the overall cost of equity release. We’ve put together a guide to paying off equity release early to help you understand your options.
Get advice from a member of the Equity Release Council
The Equity Release Council is the UK’s industry body setting standards to protect consumers. Advisers who are Equity Release Council members commit to following the organisation’s code of conduct and standards. This includes giving you ‘fair, simple and complete’ information about the costs of any plan they recommend, potential tax implications, what will happen if you move to another property, and so on.