In the 1990s, when equity release had just launched, very little regulation created a history of miss-selling. Unfortunately, that stigma has stuck around, and despite being a good potential option for some homeowners, many people 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, homeowners in the UK released £3.89bn of home equity. Equity release is a mortgage strategy that enables homeowners aged 55 and above to release money from their property whilst they continue to live in it. This can be 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 the family. Given house prices have risen by an astounding 1145 per cent since 1980, many people have a significant proportion of their wealth tied up in their homes. The money released can be taken as a lump sum or a drawdown, with those opting for the first averaging a pot of £81,700 and those opting for the drawdown typically releasing around £104,500.
Despite the negative news stories of the past, it’s clear that people are deciding to take advantage of equity release; the latest figures from the equity release council have shown a 21% increase from this time last year of new and returning customers taking out equity. With new regulations to protect customers and a wealth of information online, customers are becoming more confident to take the plunge and free up money for what they care about.
Gerard Boon, a partner at Boon Brokers, explains: “Equity release can be a great option for people in various circumstances. It can be ideal for those who need to free up some money in later life to enjoy their retirement or ease their or their family’s financial worries, but who don’t want to sell their home. There is the benefit that this is tax-free too. But the key to it all is doing your homework and making sure you understand the details. Taking independent advice is vital and is a mandatory part of the process. While most lenders are completely trustworthy and focus on their client’s best interests, there are always those who will put profit first. There are warning signs every potential borrower should be alert to.”
An educational guide for homeowners on ways to find a suitable lender and which equity release companies to avoid 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 leading causes of historical 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 cannot 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 to compare like for like. Any reputable lender should be happy to provide you with a breakdown of costs so that you can compare different options.
- Be clear on whether there are early repayment charges. Find out precisely 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 collating detailed information about your circumstances and financial situation, you should be very wary of them.
- Compare costs. There are considerable 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.
Ref: THSI-2824 | ZD.24996