This blog will talk you through whether equity release schemes are a safe option for your finances and provide you with reliable equity release advice on the pitfalls of equity release and the protection out there for anyone considering releasing equity on their property. But, first of all, we first need to know what equity release is.
What is equity release?
Equity release is simply a way of releasing money (equity) from your home, via an equity release scheme sold by a provider that is registered with the financial conduct authority (FCA) and governed by the equity release council (ERC). Equity release schemes can be applied for by homeowners over 55 who are looking for a cash lump sum of tax-free cash which often serves as useful retirement income. For more in-depth information about what equity release is, and the various equity release products available, why not check out our previous blog here.
The pitfalls of equity release
There are some key things to be aware of before you agree to any equity release plans to make equity release safe for you and your home, we’ve outlined them below so that you can take them into account when deciding whether equity release is a good idea for you to help you avoid all these common pitfalls.
Affect on means-tested benefits
If you claim means-tested benefits (state benefits) these could be affected by the amount of equity you release from your home if you take it out as a lump sum. Although, there are ways to mitigate this. Speak to our equity release specialist independent financial advisor via the website or email, or by phoning Martyn on 01752 666165 if you have any questions about this.
Releasing equity will reduce the amount of inheritance you leave for your family on your estate. The amount of loss will depend both on the amount of equity you release but also on the amount of interest it accumulates. These will be deductible from the estate once you pass.
Because the equity release interest rates are compounded with a lifetime mortgage, the amount you owe could increase significantly over time. It is worth considering whether the overall value of your home will increase within this time and help negate this interest.
Early repayment charges
You may be subject to an early repayment charge, just as with any mortgage, if you pay back the amount you borrow through equity release too early. You need to bear this in mind if you aim to pay off what you borrow for your estate, and any inheritance you pass on through it, not to be affected.
What protection is there for me?
The cornerstone of knowing whether equity release is safe is understanding what protection there is available for those taking out equity release plans like lifetime mortgages.
Because of the governing bodies that regulate providers of equity release schemes – the financial conduct authority and the equity release council- it means that all equity release providers have the same codes of conduct that they have to adhere to when offering you any kind of equity release scheme. Therefore, everyone will be entitled to the same level of protection and the same rules, making it easier for homeowners to navigate the equity release market.
No negative equity guarantee
No negative equity is guaranteed by the equity release council (ERC) to ensure that neither you nor your estate will owe more than the property is worth when it is sold. This helps protect you if the value of your home suddenly decreases for example.
Making use of an equity release calculator
It is a good idea to use an equity release calculator before making an equity release plan. That way, you will know how much money you will be able to safely borrow as well as see if you could benefit from enhanced plans and helping you decide whether a lifetime mortgage is right for you, or whether one of the other equity release products (such as interest-only plans or retirement interest-only mortgages (RIO)) on the market would better suit you.
There are plenty of free equity release calculators available online for you to use. They will use key figures such as property value and location to confirm what you may be able to borrow.
Good financial and legal advice
Getting good financial advice from a trusted independent financial adviser like us here at Coast Financial can prevent you from getting yourself into a situation that you aren’t happy with. A good financial adviser will look at all your personal circumstances, talk through the various equity release products and help you come to a decision as to whether equity release is a good idea for you and your home. A good adviser will also assist you in finding the best equity release provider for your needs to help draw up an equity release plan that suits your circumstances.
If you need help deciding whether equity release is the right option for you and your financial situation, contact our equity-release adviser Martyn for independent financial advice by email or 01752 666165.