Equity release can be the right solution for people aged 55 or over who are looking for a cash lump sum or extra regular income, but who don’t want to move to a smaller, less expensive property. However, there are some potential equity release pitfalls to be aware of if you’re thinking of taking out equity release.
There are lots of benefits in being able to release tax-free cash from your home and continue living there, but before you get started you should be aware of the pitfalls that might catch you out.
If you take out the most common type of equity release, known as a lifetime mortgage, you borrow money against the value of your home at a certain rate of interest, which is normally fixed for the full term of the plan.
The capital and interest only need to be repaid when the plan ends, which is usually when you, or the last owner if you have a joint plan, dies or moves into permanent long-term care.
You don’t need to make any repayments during the plan, but this means that interest charges can mount up quickly. The amount owed will continue to increase as interest is added to the capital amount plus the interest already accrued.
However, all providers who are members of the Equity Release Council offer a no negative equity guarantee, which means you or your family will not have to repay more than the property is worth when your plan ends.
Some lifetime mortgages, including the Saga Lifetime Mortgage, provided by Just, provide the option for you to repay some or all of the interest on the loan monthly, which means that the amount owed at the end of the plan will be less than if the interest was added throughout the plan.
Life doesn’t always follow the best-laid plans, and you might find that you either need or want to cancel your equity release plan before it’s due to end.
If you cancel your plan before the planned end date, you may be faced with an early repayment charge, which vary in amount from provider to provider.
Some providers will offer early repayment charge exemptions, the most common of which are:
Another type of equity release plan, a home reversion plan, involves you selling a share in your home to a provider in return for a cash lump sum or regular payments, and the right to remain living there. When the property is eventually sold, the provider gets an agreed percentage share of the proceeds.
This means that you or your family will not benefit from any rises in value on the share of your home that you’ve sold to the provider. For example, if you were to sell a 40% stake in your home to an equity release provider, you would only see 60% of any future house-price increases.
You might be keen to release as much equity as you can from your home and have the freedom to spend the cash on whatever you want. But approaching equity release this way can mean it ends up costing you more than it needs to, and you end up with more cash than you need.
You will pay more interest on a lifetime mortgage than your cash will earn sitting in a savings account, so you could be releasing money that you don’t immediately need for little benefit.
It is possible to arrange a lifetime mortgage with the option for a drawdown facility, where you agree a total sum you can access, but then only take out the cash as and when you need it. With this type of arrangement, you will only pay interest on the cash that you have taken out, which can make it a more cost-effective way to make use of equity release.
While you might have a considerable amount of equity in the value of your home, you won't be able to access all of the value with equity release, and the amount you are offered can be substantially less.
Equity release providers typically have to wait many years before they are repaid at the end of a plan, and as a result the reduction they apply to the amount available can be large.
Generally, the younger you are and the better your state of health when you sign up, the less equity you’ll be able to unlock. With some providers you have the option to disclose any health issues, as you could generate more money from an ‘impaired life’ scheme.
The shorter your life expectancy, the sooner the company can expect to get its money, allowing it to offer you better terms. There are few times when poor health works to your advantage, but this could be one of them.
Lifetime mortgage interest rates change over time, and there may be better rates available than when you first took out a plan.
If it’s some time since you took out equity release, it may be worth looking at your options to change that plan if better offers are available. It's important that you take account of any early repayment charge that you might face. This is one way to make sure your equity release isn’t costing you more than it needs to.
If you receive a lump sum from an equity release provider, you might lose your entitlement to some means-tested benefits, and that could take away money that you rely on for living expenses. Pension Credit, Savings Credit or even Council Tax Reduction could be affected, so you’ll need an understanding of the impact on your finances that this could have.
If you need extra money in retirement, equity release might be an appealing option, but it’s worth considering the alternatives to equity release, given the potential issues we’ve discussed here.
You might be able to downsize to a smaller property or borrow money in another way – family members might even be willing to help you. You might also be eligible for local authority grants if you want to use the money for home repair or improvements.
A good equity release adviser will discuss the alternatives with you and only recommend equity release if it’s the most suitable option based on your personal circumstances.
If you want to explore your options further and avoid the common pitfalls of equity release, you can make use of our no-obligation advice service, Saga Equity Release, which is provided by HUB Financial Solutions Limited.
Please refer to our Important information to find out more about the service and fees.
The team at Saga Equity Release can help you decide whether equity release is right for you. Arrange a call back at a time that suits you.
Mon-Thu 9am - 6pm
Fri 9am - 5:30pm
Sat Closed
Sun Closed
Excluding bank holidays
Provided by HUB Financial Solutions Limited
Find out all you want to know about equity release with expert advice.
You could release tax-free money to pay for work on your property.
From set-up fees to interest rates, we look at the cost of equity release.
