Why Equity Release needs to be a carefully considered decision

Equity Release

It’s predicted that the number of retirees accessing wealth locked in property through Equity Release could rise, but it’s not always the right decision to make. On the face of it, taking wealth out of your property can seem like an easy decision to make but it can have serious financial implications and it’s one that needs to be carefully weighed up.

First, what is Equity Release? It’s essentially a range of products that allow you to take a loan secured against your home. There are two types of products home reversion and lifetime mortgages. But the most common one used is a lifetime mortgage. A lifetime mortgage can provide a single one-off payment and/or allow you to make further drawdowns when you choose.

A lifetime mortgage is a loan secured against your main home. Typically, the interest on the loan is rolled up, but there are some options that allow you to regularly pay the interest. Without making repayments, the debt can quickly increase over a relatively short period of time. The loan and any accrued interest are paid back when you pass away or if you move into long-term care.

The rise of Equity Release

In the third quarter of 2019, Equity Release products provided £988 million of funding to homeowners, according to figures from the Equity Release Council. That’s an increase of 8% compared to the previous quarter alone and equates to £11 million every day.

In total, 11,419 new customers choose to access wealth tied up in their home through Equity Release. The decision to use Equity Release was driven by a range of reasons, including:

  • Supplementing pension incomes
  • Providing a ‘living inheritance’ to family
  • Making home improvements or age-related adaptations
  • Paying off existing mortgages or other debt

The average first instalment of a drawdown plan was £63,222, whilst those taking a lump sum took £95,557 on average.

With property prices rising, it’s easy to see why homeowners are tempted by Equity Release. Our homes are often among the largest assets we own. In fact, 61% of financial advisers believe Equity Release products will become mainstream within the next ten years, according to a survey from LV=.

5 reasons Equity Release might not be right for you

1. Interest can rapidly increase

As mentioned above, the interest on the loan can quickly add up with a lifetime mortgage.

Let’s say you’re aged 70 with a home worth £350,000. You use Equity Release to access a lump sum of £65,000 with an interest rate of 3.5% and making no repayments. If you lived for a further 20 years, the interest owed would reach £64,336.

The majority of Equity Release products now have a negative equity guarantee. This means you can’t owe more than your home is worth.

2. You may not be able to make repayments without penalties

Some Equity Release products are more flexible than others. However, you usually can’t make repayments to reduce the loan size without facing a penalty. If you hope to pay the money back during your lifetime, alternatives are likely to provide a better solution for you. Remember, your situation can change. So, even if you are not planning to make repayments now, check what the cost could be before signing.

3. It may affect your state benefits

If you currently receive means-tested benefits, receiving a lump sum or regularly drawing down from Equity Release could affect them. You should consider how these would affect your income and expenditure before proceeding. Looking further ahead, it’s also worth weighing up who would pay for care costs if you needed support in the future. If you cross certain capital thresholds you become liable for all or part of care costs.

4. It will reduce your legacy

The amount owed for the loan and interest payments will reduce how much you leave behind for loved ones. In some cases, this won’t be a priority or you may hope to use Equity Release to pass on a ‘living inheritance’.

If you’re worried about Equity Release significantly affecting your legacy, there are products that allow you to ring-fence a portion of your property’s wealth. This way you can be certain that a certain level will be passed on to beneficiaries. If you choose this option, the amount you can borrow is likely to be lower.

5. It may limit your ability to move

Do you plan to move home in the future? If the answer is ‘yes’ or ‘maybe’, Equity Release may not be the right product for you. Some products do allow you to move your lifetime mortgage, but these can come with additional restrictions and there will be less choice when searching the market.

If you don’t plan to move, think about how the house will suit your needs in ten- or 20-years’ time. Should the property need to be adapted, ensuring that you can pay for these changes in the future can give you peace of mind.

Exploring alternative options

If you’re considering using an Equity Release product, it’s likely you have a reason in mind. Perhaps you want to help grandchildren get on the property ladder or give your own home an update. Before proceeding, you should look at your alternative options. You may be able to fund your aspirations through other assets whilst still retaining your property wealth. Or you could decide that downsizing is a better solution for you.

To discuss your financial plans and how to turn them into a reality, please contact us. We’ll help you see how you could meet your objectives in a variety of ways, finding the best option for you.