Is equity release safe?

Despite past concerns, equity release is now considered to be a safe and effective way of raising funds.  Releasing equity is fully regulated by the Financial Conduct Authority, and we can offer further protection as we are a member of the Equity Release Council. Kiri Saunders-Brown, Equity Release specialist and Solicitor in our Conveyancing team, here explains the different plans that are available to you, protections that are now in place and other factors that you should review if you are considering releasing equity in your property.

What are the risks of equity release?

The main concern regarding equity release used to be that individuals could find themselves going into negative equity, meaning that you owe more than the value of your home.  However, this is no longer the case due to the nature of the products available.  There are two different equity release products:

1. Lifetime mortgage – you would borrow against the value of your home, continuing to live there and so retaining full legal ownership.  Under this type of plan, the loan does not need to be repaid until you leave the property.
2. Home reversion plan – all or part of your property is sold to a third party.  You would remain in your home, agreeing a monthly rental sum with the party who has ownership until the property is sold.  At this time, you would share the proceeds of the sale if you have only sold part of the property. 

As with any type of loan, you will need to consider the interest rates involved if you choose a lifetime mortgage.  The interest would be charged at a fixed rate, which means you will always be aware of how much interest is being accrued.  This is then added on to the total of the loan.

While releasing equity will provide you with an immediate injection of funds, it is important that you think about how this will impact your future wealth and what this means should you need to go into care in the future, if you are planning on leaving inheritance for your children or if you receive state benefits.  However, if you receive the right estate planning advice as well as the right equity release advice, the risks here can be minimised, for example by having a Life Interest Trust Will.

What are the safeguards for equity release?

Many things have changed over recent years to provide more protection for individuals looking to release equity.

1. Regulation - The first is that equity release is now regulated by the Financial Conduct Authority (FCA).  The FCA is the financial services watchdog and regulator in the UK, which means that all those who offer advice on equity release must have been granted authority to do so by the FCA, following their strict rules of conduct.
2. Equity Release Council - There is also the option for organisations such as solicitors, providers, advisers and surveyors, to join the Equity Release Council (ERC).  In order to become a member of the ERC, an organisation must adhere to the strict code of conduct when advising their clients.  We have joined the ERC and so by coming to us you can be assured that we will always ensure you have had the appropriate financial and legal advice, that we will offer plans that come with a ‘no negative equity guarantee’, such as the lifetime mortgage, and that you will be able to remain in your home for life. 
3. Improved plans - Equity release plans now offer more protections themselves.  As there are no repayments due, unless you choose to, there is no risk of falling into arrears or having your home repossessed.  If you do choose to make repayments early there is a fee, unless you are doing so due to the death of your partner or you are moving into care; however, if you have received the right advice these will be made apparent to you before you commit.  Some plans also offer an added benefit of downsizing within 5 years of taking out the plan and not being subject to fees.
4. Receiving the right advice - Anyone who is considering equity release can only take out a plan if they have taken independent financial advice at the start and must also have had one face to face meeting with a Solicitor.  These are both requirements under the FCA and ERC.   Both of these discussions will help you understand the responsibilities of the loan, your legal rights when it comes to ownership of the property as well as other associated consequences such as changes to your Inheritance Tax.

Kiri explains, “As with anything of this nature, there will be pros and cons to equity release. Receiving the right advice from the outset will make the difference between making the right decision for you or the wrong decision, and should help you avoid the risks.  We can advise as to the best plan for you and where you will receive the best value.  Rest assured, if we don’t think it’s right for you, we will tell you so; your home is your biggest asset so we will help you make the best choice, whether that be equity release, using your savings, downsizing or remortgaging.”

To discuss your situation with Kiri, you can call her on 023 8071 7438 or email kirisaunders-brown@warnergoodman.co.uk. Alternatively, you may also find the following resources useful:

• Equity release explained
• Should I release equity in my home?
• First time buyers being helped by equity release
• Do I need to see a Solicitor before releasing equity in my home?
• How long does it take to release equity?
• Can I use equity release to buy a second property?
• Can I sell my home if I have released equity?
• Should I downsize or release equity?
• How does equity release affect Inheritance Tax?
• Why we joined the Equity Release Council

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.