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Analysing Equity Release Product Safety
Equity release products, such as a lifetime mortgage, are designed for people over 55 and who have equity tied up in a property.
As a quick summary:
- You apply for up to around 50% of the value of your home.
- The lender either pays a lump sum, or you can make smaller withdrawals.
- Interest accumulates but is added to the total debt balance.
- When you die or enter into care, the lender sells the property.
- The proceeds are used to repay the debt, and the balance goes to your estate.
There are many horror stories about vulnerable pensioners being tricked into losing their homes.
Still, a lifetime mortgage or an equity release loan from a reputable lender is a legitimate and inherently safe product.
Of course, the downside is that your property will usually be sold (unless you have other wealth or assets that your beneficiaries can use to pay back the debt).
However, millions of homeowners use this type of loan to finance a comfortable, enjoyable retirement.
The Risks of Equity Release Explained
It's always essential to go into any financial agreement with your eyes open - but much of the scepticism about equity release mortgages dates back to the 80s and 90s when standards were very different.
Some borrowers lost their homes, usually because the lender wasn't regulated - today's mortgage lenders are all authorised by the Financial Conduct Authority (FCA).
Whether a specialist equity release provider or a high street bank, every lender must be FCA regulated to offer lending products to private applicants.
You cannot lose your home by taking out an equity release product - for as long as you live.
The Equity Release Council approves schemes that have appropriate safeguards, which mitigate all of the concerns you may have.
Equity release is now safer than ever, although it is still important to review your financial circumstances and think carefully before you make a decision.
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What Are the Guidelines Equity Release Schemes Need to Comply With?
There are several rules and guidelines lenders must comply with, which protect consumers in all circumstances.
We only recommend lenders and providers who we know are affiliated with The Equity Release Council because that association means you won't compromise your wealth or put your home at risk.
If you’d like to double-check whether a potential lender has approval from The Equity Release Council, please get in touch!
Is Equity Release Safe?
Equity release mortgages are safe in that you have a negative equity guarantee - we'll explain this in a bit more detail shortly.
However, there are risks to be aware of, and these apply to pretty much any mortgage product you consider applying for:
- Some lenders will charge additional fees, such as application costs, or early repayment charges, so you need to be aware of all the potential fees before applying.
- Interest rates on equity release mortgages can vary if you don't have a fixed-term deal - although the total debt will be subject to a cap.
- If you opt for a product that doesn't allow regular interest payments (which you can choose to pay or not), the total owing will add up. Interest will continue accumulating until the lender sells the property.
It's important to consider how much you wish to borrow, what Loan to Value that represents - i.e. the percentage of your property's value - and whether there is likely to be anything left over when the time comes to sell.
Could I Lose My Property Through Equity Release UK Products?
No - provided you apply for an equity release product through a trusted lender authorised by The Equity Release Council, you cannot lose your property or be forced to move.
The lender can only recoup the debt when you cannot use your home, either because you pass away or go into long term care - you have a guaranteed right, called the right to tenure, which means you are legally entitled to live in your home for life, along with a partner.
Equity release mortgages carry no repossession risk.
If you have an interest-only mortgage, you can even refinance with an equity release loan to pay back the debt and safeguard yourself from any repossession exposure.
Borrowers also have the assurance that an equity release product doesn't expose any other assets, including second properties or cash savings.
The debt is secured against your primary residential property, and a lender won't have any 'back-up' security they can call on, so there is no impact on anything else you may own.
Benefit Income and Equity Release Explained
One potential pitfall of equity release is that if you rely on pension credit or benefits income such as council tax payments, an equity release lump sum payment may impact your entitlement to means-tested benefits.
A large amount of capital may take you over eligibility thresholds, and even if you spend or gift the cash, it'll still mean you have much greater wealth at your disposal than beforehand.
The Department for Work and Pensions depends on your income to calculate your benefits, so it's worth doing your sums before applying to ensure the loan would be sufficient to rebalance other income streams.
What is the Worst-Case Scenario of Equity Release Schemes?
We've talked about the negative equity guarantee, which is a key benefit of an equity release mortgage, particularly if you do not have enough saved for retirement to cover your expenses or would experience a severe drop in living standards.
That guarantee means that you cannot end up in a negative equity situation regardless of how long you live or how much you have borrowed.
Negative equity means you owe more than you own, so in the past, that could have happened if interest was repeatedly added to the debt and ended up being more than the property was worth.
Therefore, the worst-case scenario is that you borrow a large amount through equity release (normally up to 50% but sometimes 55% or 60% of your property value).
If you live a long, healthy life, it's possible that the interest could become greater than the original amount borrowed, usually if you aren't making contributions to pay back the interest as you go.
However, the lender can never recoup more than your property is worth, so the result is that the lender sells the home and accepts the difference as a loss.
Of course, you wouldn't be able to pass the property to an heir, and there wouldn't be any cash left over from the sale - but your beneficiaries equally couldn't inherit a debt.
How Can I Get Independent Advice About a Lifetime Mortgage Equity Release Product?
While the risks are minimal, multiple potential products may be suitable, depending on what you wish to borrow and for how long.
As a highly experienced team of brokers, we support clients to ensure they make clear decisions about their finances and thoroughly understand all the pros and cons before choosing the right option.
Please get in touch through one of the options on our Contact pages, and we'll be happy to arrange a convenient time to discuss!
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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.
We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.