A new trade body to better protect consumers who release money from their home, using a product called equity release, was launched this week.
The Equity Release Council – formerly Safe Home Income Plans – has extended its membership to financial advisers, lawyers and other professionals, as well as product providers, in order to ensure that consumers are not mis-sold equity release and strengthen its codes of conduct.
The Council estimates that three quarters of homeowners expect to use property for financial planning purposes at some stage in their lives.
With this in mind, Which? explains the benefits and pitfalls of equity release in this handy guide.
What is equity release?
Equity release is a way of releasing money from your home without having to move. It can be used to fund long-term care, to help your children on the property ladder or for home improvements or holidays.
Aimed at people over 55, you borrow money against your home but don’t have to pay it back until the house is sold, usually if you die or move into long-term care. There are two main types of equity release scheme – home reversions and lifetime mortgages.
How does a lifetime mortgage work?
You borrow money against a proportion of the value of your home; the older you are, the more you will be able to borrow. You don’t make repayments, but instead the interest compounds or ‘rolls up’. The debt is not repaid until the house is sold.
Interest rates are often fixed, and tend to be higher than with traditional mortgages. As you are not repaying anything while you’re living in the house, the debt can grow quickly. As a general rule of thumb, it doubles every 10 or 11 years.
What are drawdown schemes?
Most lifetime mortgages now come with a drawdown option, which allows you to agree the total amount you want to borrow at the outset, but releases it in smaller sums as you need it. You only pay interest on the money as you borrow it, so drawdown is more cost-effective than borrowing a lump-sum at the outset if you don’t need it all immediately.
How does a home reversion scheme work?
Home reversion allows you to sell all or part of your home to a reversion company in return for a lump sum. You retain the right to live in the property until you die or move into long-term care, and you remain responsible for its upkeep.
You will get less than the market value, and the proportion of the value you get will increase as you get older. When your home is sold, the reversion company takes its share of the sale price.
Are there any risks to taking out an equity release scheme?
Equity release can be expensive, and it can limit your future options. Although most schemes are portable, if your new home is cheaper you may have to repay some of the money. In addition, there may be restrictions on the type of property you can take the scheme to – for example, sheltered accommodation.
Many schemes have early redemption charges if you decide you want to pay the money back. These can be expensive, though in some cases they only last for the first five or 10 years. Taking out equity release can also affect your state benefit entitlement.
Are there any alternatives to equity release?
You could downsize, allowing you to release money from your home without paying the interest and other costs associated with equity release. If you have savings and investments, consider using these first – you’re unlikely to make the same interest on savings as you would pay on borrowing through equity release. Also, make sure you’re claiming all the benefits you are entitled to.
Should I get advice about whether equity release is right for me?
If you’re considering equity release, talk to a specialist independent financial adviser (IFA). The Society for Later Life Advisers (SOLLA) has a list of accredited IFAs, many of whom will be qualified to advise on equity release (www.societyoflaterlifeadvisers.co.uk). The Consumer Credit Counselling Service (CCCS) also has a specialist equity release team that can offer advice.