There were downsides in that the companies were not heavily regulated, lump sum could impact on benefits such as pension credit and any other means tested state benefits and you are not paid the full market rate for the portion of your home you sell.
If you die or sell your home shortly after taking out an equity release scheme, you could lose money. There may also be early repayment charges if you decide to repay what you owe within a short time after taking out the deal. If house prices fall, you may owe a greater percentage of your home's value.
The pitfalls of equity release
Therefore if you take excess money out of your property, you will be paying more, than you will earn interest on it in a savings account. What's more, the interest rate charged generally increases as you borrow more money from your home.
As with many products, equity release has its drawbacks. For instance, it is a loan secured against the value of your property, which means it will need to be paid back when you die or go into permanent care. And the amount of the inheritance you can leave behind will be reduced.
You should avoid equity release companies that are not authorised and regulated in the UK by the Financial Conduct Authority (FCA) and are not members of the Equity Release Council (ERC). Dealing with such companies means you are exposed to several risks, which we will discuss in detail below.
Accessing pension funds can be an alternative, but it's essential to understand the tax implications and potential impact on your retirement income. Downsizing could potentially be a better option than equity release if you're comfortable moving to a smaller property and the equity in your current home is substantial.
In the instance that your lender fails, and is unable to continue trading, their existing plans will be sold onto another lender. The new lender will be contracted to maintain the original lender's plans precisely as they were set up. You, as the client, are protected, with clauses written into the original contract.
No, equity release is not a con, but it does come with risks and drawbacks that need to be carefully considered before making a decision.
At age 55, if you wanted to release 20.00% of your property value, the best interest rate would be 7.20% (AER). At age 75, if you wanted to release 20.00% of your property value, the best interest rate would be 5.44% (AER).
Consider, too, that when you liquidate equity, you dilute your homeownership stake. That makes your property a less valuable asset and decreases your overall net worth. Tapping into equity increases your overall debt and what you will owe your lender — both in principal and interest — over time.
With equity release, it is your choice whether or not to make any payments in your lifetime, and this includes interest payments. Should you choose to make no payments, the interest charged will roll up over time and only be due for repayment when the last homeowner passes away or enters long-term care.
Can I pay off equity release early? Yes – if you take out a lifetime mortgage, a type of equity release, you can pay back some or all of it early. But lifetime mortgages are long-term products, so that's usually not the best option. You'll probably have to pay an early repayment charge (ERC), which can be very high.
The equity release plan will come to an end when the last borrower dies or moves into long-term care, and the provider will need to be repaid. If you're the sole name on the plan, your surviving partner may need to move out so that the property can be sold to clear your debt.
What is the average interest rate on equity release in 2024? According to the Equity Release Council, the average interest rate is currently just over 6%, based on lifetime mortgages across the UK. The best interest rate today is 5.31% MER. Subject to suitable eligibility criteria including age and property type.
HELOCs are generally the cheapest type of loan because you pay interest only on what you actually borrow. There are also no closing costs. You just have to be sure that you can repay the entire balance by the time that the repayment period expires.
Recent innovations in equity release products include more control over costs, reduced penalties, and diverse repayment options. The Equity Release Council plays a crucial role in maintaining industry standards and protecting borrowers, ensuring safer and more transparent equity release options.
Deciding To Take Equity Out Of Your Home
Whether you choose a home equity line of credit (HELOC), a home equity loan, or a sale-leaseback agreement, you can unlock your home's equity while avoiding refinancing. This also applies to investment properties, too.
The equity release process is not quick. You must receive advice to ensure that it meets your current and future needs and circumstances, as well as making sure you understand any risks of taking out equity release. It can take around eight weeks for the process to be completed, and for you to receive the funds.
DON'T take out excessive equity.
Also keep in mind that a home equity loan or line of credit decreases the amount of equity you have in your home. If you have taken out too much equity and the real estate market drops, you can end up losing all the equity in your home.
You can take equity out of your home immediately or only a few months after closing, depending on the lender. However, you'll incur closing costs. So, it might be better to wait a while since you'll need to pay some money upfront to pull equity out of your home.
When weighing up remortgaging vs equity release, you might want to take the following factors into account: Your income – remortgaging to raise capital requires you to make monthly repayments, whereas an equity release plan does not. For this reason, your income level could be a factor in your decision.
Equity release lets you access tax-free cash from your home. There are lots of reasons people take it out. Common ones include paying off debt, gifting to family or making home renovations. You can only take out equity release through a qualified financial adviser – if you don't have one, you can find one at Unbiased.
You may be able to get equity release through your Bank, but only if you Bank with the Lloyds Banking Group or Nationwide building society. Most Banks, such as Santander, HSBC and NatWest, do not offer equity release. Instead, they will refer you to an equity release adviser with whom they have a business agreement.