Is Equity Release a Con?

Equity release has a bit of a dodgy reputation, because there were products back in the day that looked to take advantage of people. As with many areas of financial services, lessons have been learned from the past and new regulations put in place, which means this situation has improved a lot over the years.

In short, equity release isn’t a con or a scam. Like many financial products, there are pros and cons, but it is a perfectly viable option for people looking to access the equity in their home. In this article, we’ll explain how equity release works, what the benefits of equity release are, as well as the disadvantages and things to be aware of. 

What is Equity Release?

First let’s have a look at what equity release is. Equity release is a type of loan against your home, which allows you to access the equity you have accrued. Another name it’s sometimes known as is a Reverse Mortgage, because it increases over time rather than being paid down.

Let’s consider an example. Say you’re retired, and you’re finding it difficult to manage financially on the State Pension and your existing assets. Say you also own the home you live in, worth  £300,000. This means that you have £300,000 of your net worth tied up in an asset that you’re unable to use to meet your day to day living expenses. 

A traditional mortgage isn’t likely to be an option, as it will be hard to get approval if you’re already retired and finding your income levels tight. You could sell the property and move to a cheaper one, but this involves costs and you might not be able to find another suitable property at a lower cost in the area you want to live in.

An equity release product allows you to access some of this equity without having to move out of the property. The cash that you release from the value of your property can be paid in a lump sum or as an ongoing income stream. Now it is still a loan that will need to be repaid, but there are a couple of main ways that this can be structured to allow you to access the funds without also incurring an ongoing mortgage repayment. We’ll cover the 2 main types next.

What are the Different Types of Equity Release Product?

As with any financial product, different companies offer different options that all have specific features and benefits. Whilst there is a reasonable range available, they generally fall into 2 main categories.

Lifetime Mortgages

A Lifetime Mortgage is quite similar to a normal mortgage, with the difference being that the interest can be rolled up, and there can be an amount stipulated to be untouched and left to family. You can also elect to make repayments on the mortgage like usual, but this would somewhat limit the benefit of accessing equity to help with living costs.

The more common scenario would look something like this. Using the example above of a £300,000 property, let’s say you want to access £100,000 from it. You could take out a Lifetime Mortgage with a limit of £100,000 which could be drawn down as a lump sum or as an income stream. Say that the interest rate is being charged is 3% and you decide to take £10,000 a year from the account. After the first year, you’ll owe the £10,000 you’ve taken plus an additional 3% interest of £300. This process will continue in future years as you draw down more and accrue more interest.

When the owner of the house eventually passes away, the debt will be added to the estate. In the above example, if the person passed away after this first year, and assuming there hasn’t been any growth in the property, the £10,300 debt would need to be paid by the Executors of the estate, with the remaining value on the property paid to the beneficiaries.

Home Reversion

The second option is a less common approach to equity release, as it involves selling a portion of your home. In this method, the home reversion company will buy a percentage and become the part owner of your home. You’ll often receive a lower value for this portion than you would if you sold the whole property on the open market, because the home reversion provider doesn’t know when they’ll be able to recoup their investment.

You can usually receive the reversion payment in one lump sum or as a series of payments, and there will likely be the requirement for you to keep the house in good condition. This means that the reversion company will want to inspect your property every now and then.  

What are the Benefits of Equity Release?

For many people, their home is their biggest asset. Once it’s paid off, this means a really big chunk of someone's net worth is tied up in an asset that costs money to maintain, and can’t be easily sold off in bits to fund ongoing living expenses.

The key benefit of equity release is that it unlocks this value. It allows you to use the value of your property to fund either regular living expenses, larger ad hoc costs such as holidays or even things like gifting.

What are the Pitfalls of Equity Release?

Equity release doesn’t come without a cost. If you take a typical equity release mortgage, you will have interest added to your loan which will need to be repaid to the mortgage company when you pass away. This will mean that your beneficiaries will get less than they would if you didn’t take the equity release mortgage.

The interest rates that are charged are also generally higher than a typical residential mortgage. There are also fewer providers that offer equity release, which means that there is less competition in the market and options for you to choose from.

Obviously you’ll also limit your options for using the value of the property in the future. For example, if you were considering downsizing into a property that’s more manageable to look after in your later years, you might find you no longer have sufficient equity in your property to be able to afford to do this.

It could also be an issue if you need to move into long term care in your later years. You would still be able to sell the property to help pay for this, but your share of the proceeds will be less as you’ll need to repay the equity release mortgage.

For a home reversion equity release, you won’t be getting the full market value on the percentage of the property that you sell. For example, if you have a property that is worth £200,000 and you want to sell 50% of it, the home reversion provider may only offer you £50,000 for that 50%. 

Receiving extra cash from either method of equity release could also impact things like means tested state benefits and your inheritance tax liability. It’s worthwhile taking some advice from a professional as to how your overall financial situation might be impacted if you decide to proceed with an equity release mortgage.

Is Equity Release a Good Idea?

Equity release can be expensive and complicated, but that doesn’t mean it’s not a good idea for some people. The main issues you would want to consider to decided whether equity release is right for you, is how affordable your ongoing lifestyle is, and whether you are prepared to move.

If your home is your only main asset and you need more money to meet your living expenses, you could first consider downsizing or moving to a more affordable area. This could unlock some value from your property and allow you to realise cash without any ongoing interest or inspections.  With that said, moving house also incurs fees and costs so it’s important to weigh these up against each other.

However, if you really don’t want to move house but you need to unlock some of the value from it, equity release is really one of the only options for you to consider. It will cost money to put in place and will likely mean ongoing interest and charges, but it will also allow you some additional freedom in your day to day living expenses. 

The most important thing is to make sure you have all the information you possibly can, and understand all of the disadvantages that come with the particular equity release product you’re looking at. That way, you can decide whether those disadvantages are worth it for you specifically.