Let’s be honest, equity release hasn’t had the best reputation due to historic mis-selling when the products were newly launched and unregulated in the 1990s.
Despite them being a good potential option for some homeowners, many are put off because of the horror stories they have heard – even though the products and regulations have changed and tightened dramatically over the last 15 years.
In 2020 £3.89bn was released to homeowners in the UK from their homes via equity release. Equity release enables homeowners aged 55 and above to release money from their property, whilst they continue to live in it – either as a lifetime mortgage or home reversion. Between 30 and 58 per cent of the property value can be borrowed, which is often used for home improvements, living expenses, to pay off debts or even as a ‘living inheritance’ for family. The money can be taken as a lump sum or a draw down, with those opting for the first averaging a pot of £81,700 and those opting for the draw down typically releasing around £104,500.
Gerard Boon, partner at Boon Brokers, explains: “Equity release can be a great option for people in a variety of circumstances. For those who need to free up some money in later life to enjoy their retirement, or indeed just to ease their or their family’s financial worries, but who don’t want to sell their home, it can be an ideal solution. There is the benefit that this is tax free too. But key to it all is really doing your homework and making sure you understand the details. Taking independent advice is vital and in fact is a mandatory part of the process. While most lenders are completely trustworthy and are focussed on their client’s best interests, there are always those out there who will put profit first. There are warning signs every potential borrower should be alert to.”
An educational guide for homeowners on Equity Release Companies to Avoid and ways to Find a Good Lender highlights some of the questions people should ask and the situations which may be a red flag.
Below is a summary of the things that you should take into consideration when looking for an equity release lender:
- Are they registered with the FCA and members of the ERC? Always ensure your lender is registered with the Financial Conduct Authority and that they are a member of the Equity Release Council. This offers you protection as it means they are regulated. You are at risk of being mis-sold a product without any rights to compensation if you do not choose an FCA registered lender.
- A no negative equity guarantee is essential. A member of the ERC will offer a no negative equity guarantee and competitive, capped/fixed interest rates – the main causes of historic issues with equity release products.
- Ensure you have a right to remain and a right to move. This should happen if you choose a member of the ERC. An issue some people find after taking out an equity release product, is that they are unable to move to another property. This may not be your plan, but without a crystal ball you want to make sure you have options and flexibility in case circumstances change.
- Get a clear breakdown of costs so you can compare like for like. Any reputable lender should be happy to provide you with a breakdown of costs, so you can compare different options.
- Be clear on whether there are early repayment charges. Find out exactly what these are as some can be extremely high.
- Run away from anyone offering loans before knowing your circumstances. If a company offers you a large loan sum without having collated detailed information about your circumstances and financial situation, you should be very wary of them.
- Compare costs. There are numerous upfront costs associated with equity release, including valuation fees, arrangement fees, legal fees, completion fees and financial advice fees – although a few brokers offer services free of charge. Be sure you know what to expect.