What is the catch with equity release
 

What Is The Catch With Equity Release | February 2024

For homeowners reaching retirement age, equity release offers a tempting opportunity to release a tax free lump sum of cash tied up in their property. However, there are a few things that you should be aware of before taking out an equity release plan.

This article will discuss some of the main disadvantages of equity release that you should consider as well as some common mistakes, and ways to avoid risk when taking out a plan.

Topics that you will find covered on this page

How does equity release work

Equity release works in one of two ways. Either you take out something known as a Home Reversion scheme, in which you sell a portion of your house to an equity release provider for less than its market value. Or, you take out a lifetime mortgage, which involves borrowing a large loan secured against your property. This is the more common form of equity release. 

With both kinds of plan, there is no need to make any monthly repayments and you can continue to live in your home rent free for the rest of your life. The money only needs to be paid once you die or move into long term care. With an equity release mortgage, interest is accumulated monthly and added to the total loan to be repaid out of the property sale.

You can use an online equity release calculator to get an initial indication of how much money you could release, however you should always seek professional advice for a more accurate idea. 

A short video on how equity release works

Why would people release equity?

There are many reasons why people consider equity release a good option for them. Some of the main reasons people release equity from their homes are as follows:

To pay off a mortgage or debts

Some people will take out equity release to pay off their outstanding mortgage or any other debts that they may have. Equity release can provide a very quick fix to your debts, in certain circumstances.

Sometimes equity release providers will make it a condition of the plan that you pay off any existing debts with the funds released.

It is also much easier to be approved for an equity release loan than it is for a regular mortgage or other kind of loan. You do not need to undertake an affordability assessment as the loan is secured against your property. However, your provider will check whether there are any other loans secured against the home before approving the deal.

To fund home improvements

Sometimes people want to use the money simply to renovate their homes. This can be for purely aesthetic reasons or it can have a more practical focus. For example, you might want to adapt your home for more comfortable living in your old age.

Moving the key rooms downstairs, installing a stairlift, or replacing a bath with a shower, can all be good investments for your future.

To boost income

Sometimes people simply want to top up their retirement income. A good way of doing this is using a drawdown lifetime mortgage. This allows you to access the tax-free cash only when you need it. You receive the money in instalments rather than as a lump sum and only pay interest on what you take. This creates the effect of having a regular income, which is appealing to some. 

Speak To An Equity Release Advisor Or Use the Equity Release Calculator Below To Estimate How Much You Can Borrow

The UK Care Guide works in partnership with Boon Brokers, one of the UKs leading equity release specialists.

You can contact them on 0333 567 1607 , or use the equity release calculator to estimate how much you can borrow.

Here is what Boon Brokers Offer

Whole of market access
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5 star client testimonials, on Trustpilot, about Boon Broker’s support and hands-on service

Call Boon Brokers on 0333 567 1607 to discuss your equity release requirements.

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use the equity release calculator to see how much money you could release from your property. Takes less than 60 seconds!

All equity release and mortgage advice is provided by Boon Brokers Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757. 

If you take out a product with Boon Brokers, we will receive a fee for introducing you to them. Boon Brokers provides advice for free and without obligation.  By contacting Boon Brokers through us, the cost of any equity release product would be the same as if you had contacted them directly.  

The fee we receive is used to help keep this site operational and to produce new content.  

Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

4 little known truths about equity release

To gift to loved ones

Often, homeowners like to use their released cash to help a family member. They may need the money at a specific point in time, for example to get a deposit on a house of their own.

This can potentially be a tax efficient way of helping as, if you pass the cash on to your beneficiaries at least seven years before your death, they will not have to pay tax on it. 

Similarly, you will be reducing the value of your estate, and depending on your property’s worth, you might reduce it below the threshold for inheritance tax.  Therefore, this is a common reason for people taking out equity release on their home.

Disadvantages of equity release

While equity release can offer retirees considerable freedom to access the capital in their homes tax-free, it also comes with some significant disadvantages.

It can be expensive

The first catch with equity release is that it can be very expensive. You will be charged interest on the loan and interest rates for equity release will be much higher than those for standard mortgages or for credit card deals. Making interest payments can be a good idea so that you don’t end up owing more money than necessary. 

There are many hidden fees to consider, such as legal fees, valuation fees and a mortgage arrangement fee.

Most people choose not to make any monthly payments on the loan. This is often seen as one of the main advantages of equity release, in fact. However, not paying interest or any repayments means that the unpaid compound interest will rapidly mount up and you could easily wipe out your remaining property value. 

On the bright side, you should never owe more than the value of your home due to something called the ‘no negative equity guarantee’. Lenders who are members of the Equity Release Council will offer this guarantee and it will mean that you won’t be passing on your debt to the next generation.

Lack of flexibility

The next biggest catch is the lack of flexibility. Lifetime mortgages have become more popular than Home Reversion schemes due to their greater flexibility; however, they are still relatively restrictive.

If you change your mind, for example, and want to make some early repayments, you will likely be hit with significant early repayment penalties.

If you decide that you want to move house to somewhere smaller, you may find it difficult to transfer the lifetime mortgage to a new property and find that you are stuck in your current home.

pitfalls of equity release

Risks of Home Reversion plans

The main problem with home reversion plans is that you will sell your property for a good deal under the actual property value. Sometimes this can mean that you receive as little as 30 percent of the value of your home. Additionally, if you sell the whole thing, you won’t benefit from an increase in property values in the future. 

Often, since you do not retain ownership in this kind of plan, the house will have to be vacated very quickly after your death and this can cause unnecessary extra stress on your surviving family members.

Home Reversion plans are particularly restrictive and you may find that it is very difficult to move home if you decide that you want to at some point down the line.

You should always make sure that you seek financial advice from an equity release adviser so that you are not surprised by any hidden costs later on. 

Mistakes made with equity release

One of the most serious pitfalls of equity release that people often meet is taking out more money than they needed to. With lifetime mortgages, you will be paying compound interest on all of the money that you borrow, and you will not be able to make as much interest by keeping the money in a savings account.

You should think about taking out a drawdown lifetime mortgage instead of a standard one as this allows you to take the money out in little chunks rather than as a lump sum, and only pay interest on what you take out. This will save you problems down the line with compound interest.

Early Repayment Charges

Early Repayment Charges are sadly an unavoidable part of releasing equity. If you take out a lifetime mortgage and want to pay off some of the money in instalments, you will most likely be charged steep fees for doing so.

Best Equity Release Interest Rates as of 24 February 2024

The table below shows you some of the best equity release rates, as of 24 February 2024, for lifetime mortgages from some of the leading equity release providers in the UK. 

Provider NameProduct NameInterest RateType of productOffers
Standard LifeHorizon 200 Drawdown5.26%FixedFree Valuation
Standard LifeHorizon 200 Drawdown Fee Free5.31%FixedFree Valuation
No application fee
More2LifeCapital Choice Ultra Lite Drawdown 15.46%FixedFree Valuation
No application fee
LV=Drawdown Lifestyle DD15.58%FixedFree Valuation
No application fee
Scottish WidowsFR15.60%FixedCashback
Free Valuation
No application fee
Standard LifeHorizon 280 Drawdown5.60%FixedFree Valuation
Legal & GeneralInterest Roll-Up 15.61%FixedFree Valuation
Legal & GeneralOptional Payment 15.61%FixedFree Valuation
LV=Drawdown Lifestyle DD25.63%FixedFree Valuation
No application fee
Legal & GeneralInterest Roll-Up 1 (no fee)5.65%FixedFree Valuation
No application fee

Call Boon Brokers on 0333 567 1607 to discuss your equity release requirements and see what deals are available to you.

These rates may have changed since this table was updated and should be taken as indicative only. There may be other providers not listed on this table that could offer better deals.  In addition, the providers and products noted may not be right for your particular circumstances.  The equity release rates have been sourced from the Equity Release Supermarket. These indicative rates and incentives may have changed since this article was last updated. Therefore, they should only be taken as a guide, and we cannot guarantee their current accuracy. Please also note that we do not provide advice on or endorse any particular product listed here. The rate you are offered will depend on your individual circumstances and subject to lender approval. Therefore, we strongly recommend that you speak to an equity release adviser, who will be able to provide you with information on the latest rates that apply to you.

martin lewis lifetime mortgages

Some lenders have fixed penalty charges depending on how many years it has been since you took out the plan. For example, the charge will be a percentage of the total loan, and the percentage will decrease, the more time that has passed since taking the plan out.

Some lenders state a certain time point from which repayment charges no longer have to be paid. These are things that you should discuss with your lender if you think that you may want to repay any of the loan early. 

Exemptions to look out for

When choosing an equity release company, check whether they offer downsizing protection. This means that you can move to a smaller, or less expensive home and repay the capital borrowed without incurring any early repayment fees.

You should also check whether they offer a ‘significant life event exemption’. This allows you to repay the loan within a few years of the death of the first homeowner in the case of a joint application.

Impact on benefits

Another unfortunate consequence of equity release is that it will impact your entitlement to means tested benefits. You will still be eligible for the state pension, but, since the money released is treated as income, you may lose your eligibility for other government grants, such as pension credit.

In situations such as this, you should always make sure to talk to a financial adviser and they can calculate whether equity release would be poor value for you.

Joint application equity release

There is a catch with equity release to consider when it comes to joint equity release. The loan is due for repayment when the last borrower named on the plan passes away or moves into permanent care.

If you live with your partner, you must make sure that both of you are named as joint borrowers on the equity release plan as this will ensure that the surviving borrower can continue to live in the home even after the death of the first. 

equity release example

If you neglect to name both parties on the plan, however, you could end up with a situation in which your spouse is forced to sell up and move out of the family home, in order to repay the debt.

How to reduce risk with equity release

Many people wonder ‘is equity release safe?’ There are many potential pitfalls with equity release but it is possible to make it work for you. In order to avoid risk when taking out equity release, it is a good idea to take the following precautions.

Talk to an adviser

It is always a good idea to get equity release advice from a professional mortgage broker. They will take into consideration your age, health, finances and any family that you may want to leave money to.

Financial advisers will ask you what you want to achieve with the money and they will offer you alternative ways of raising the money, if there are any.

Once you have decided that home equity release is the right option for you, the adviser will make an estimate of how much cash you will be able to release and they will make a suggestion of an equity release product to go with.

If the adviser thinks that equity release is right for you, they will estimate how much cash you can release and suggest suitable equity release products. They should also give an indication of how much compound interest should mount up. This will depend on interest rates and whether you choose to make any repayments. 

Discuss with your family

Equity release plans can have a big impact on how much money you have left to give to your family when you are gone. This is why it is important that you discuss your equity release plans with your family before committing to anything. 

You may be able to work out a plan with them to repay some of the interest together, to reduce how much is taken out of the final property value.

how much interest do you pay on equity release

Only use FCA approved lenders

Finally, you should make sure that you only work with lenders and advisers who are approved by the Financial Conduct Authority and members of the Equity Release Council. This will offer you a number of guarantees, set a limit on interest rates, and make equity release safe to undertake. 

Can I be forced out of my home?

If you have taken out a product with a lender regulated by the Financial Conduct Authority, you will never be forced to make any repayments while you are alive and you will never be forced to leave your home. You will have a right to remain in the property until you die or move into long term care.

Will my children inherit my debt?

Your beneficiaries will be responsible for paying your debt out of the sale of your estate however they will never owe any more than this. The Financial Conduct Authority ensures that you will have a ‘no negative equity guarantee’, meaning that your children will never owe more than your property is worth.

Can I sell my house with equity release?

It is possible to sell your house and move while you have an equity release scheme in place, however, you should be prepared to pay significant early repayment penalties. Look for an equity release provider who offers downsizing protection to get a bit more flexibility in your future.

Can I end my lifetime mortgage early?

Similarly, you can choose to end your lifetime mortgage early but it will mean early repayment fees. This is why it is important to talk to an independent financial adviser and think through all the implications of your decision before you take out a plan.

interest on equity release

Is there a better alternative to equity release?

So, is equity release a good idea? As we have seen, there are a number of catches when it comes to taking out equity release, but it can still work for you if you are careful and plan wisely.

If equity release is not right for you, there are other alternatives for you to consider.

You could look at other shorter-term loans, such as personal loans, or credit card loans. You could also consider remortgaging your house to reduce your monthly expenditures.

Often, downsizing can be a good way to free up some cash for retirement. You can make the most of cheaper house prices and avoid many of the risks which you come across with equity release.

Finally, you could consider checking whether you qualify for any government grants.

use the equity release calculator to see how much money you could release from your property. Takes less than 60 seconds!

Financial Promotions Sign-off

Where applicable, the adverts for Boon Brokers on this page have been signed off as a Financial Promotion by Boon Brokers Limited, to ensure that they are in compliance with Section 21 of FSMA. Boon Brokers Limited is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757. The Age Partnership equity release calculator has been approved and provided by Age Partnership. Age Partnership is a trading name of Age Partnership Limited, which is authorised and regulated by the Financial Conduct Authority. FCA registered number 425432.

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Frequently Asked Questions

How does equity release work

Equity release works in one of two ways. Either you take out something known as a Home Reversion scheme, in which you sell a portion of your house to an equity release provider for less than its market value. Or, you take out a lifetime mortgage, which involves borrowing a large loan secured against your property. This is the more common form of equity release.

Can I be forced out of my home?

If you have taken out a product with a lender regulated by the Financial Conduct Authority, you will never be forced to make any repayments while you are alive and you will never be forced to leave your home. You will have a right to remain in the property until you die or move into long term care.

Will my children inherit my debt?

Your beneficiaries will be responsible for paying your debt out of the sale of your estate however they will never owe any more than this. The Financial Conduct Authority ensures that you will have a ‘no negative equity guarantee’, meaning that your children will never owe more than your property is worth.

Can I sell my house with equity release?

It is possible to sell your house and move while you have an equity release scheme in place, however, you should be prepared to pay significant early repayment penalties. Look for an equity release provider who offers downsizing protection to get a bit more flexibility in your future.

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Get fee-free equity release advice from Boon Brokers.  

Call : 0333 567 1607

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If you take out a product from Boon Brokers, we will receive a fee for introducing you to them.

Unlike most equity release advisors, Boon Brokers do not charge any fees! Have a free consultation to see how they can help.

You can speak to Boon Brokers on the number below and discuss your options

0333 567 1607

Use the equity release calculator and see how much money you could receive.

You can book a call back from for an equity release specialist, who can call you when it's conveniant

All equity release advice is provided by Boon Brokers Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757. 

 

If you take out a product with Boon Brokers, we will receive a fee for introducing you to them. Boon Brokers provides advice for free and without obligation.  By contacting Boon Brokers through us, the cost of any equity release product would be the same as if you had contacted them directly.  

The fee we receive is used to help keep this site operational and to produce new content.  

 

Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

Get FEE-FREE Equity Release Advice