The risks of equity release

Understand the risks before taking out equity release

Equity release can be a good way for people aged 55 and over to benefit from some of the value locked up in their homes without having to sell up and move. But along with benefits, there are also risks with equity release that you should explore before you make a decision.

What are the risks of equity release?

Taking out equity release is a significant commitment so it’s very important that you make sure:

• You select a reliable provider;
• The advice firm you use is authorised and regulated by the Financial Conduct Authority;
• The equity release option you choose is the best solution for what you need.

Here are some warning signs that should cause you to pause before taking any equity release plan.

1. You don’t have a “no negative equity” guarantee

With a lifetime mortgage, interest is charged on the capital you borrow against the value of your home. As lifetime mortgages apply compound interest, you'll be charged interest not only on the initial loan but also on the interest that is added each year. This interest adds up over the years and is usually only repaid when you or the last borrower on a joint plan die or move into permanent long-term care. A lifetime mortgage is a loan secured against your home.

A “no negative equity” guarantee is offered by providers who are members of the Equity Release Council (ERC). This ensures that you, or more specifically, your estate will never owe more than the property is worth when it is sold following death or entry into long-term care.

Top tip: You should check that this guarantee is offered on any equity release plan you’re considering.

2. You haven’t consulted your beneficiaries

Taking out equity release will have an impact on the inheritance you will be able to leave when you die. It’s good to discuss your plans with your beneficiaries before you decide to take out equity release, to explore alternatives and to prepare them for what happens with equity release when the plan ends. 

Top tip: Have a family member or trusted friend present on phone calls or meetings with an adviser to support you and help you decide on the right next move. A good adviser will allow this, and even encourage it.

3. You don't know if your options will be restricted if you want to move home in the future

Equity release is a great way to free up some of the value in your home without having to move, but there may be reasons why you’ll want to move in the future. You might want to move closer to family to help out with childcare for your grandchildren, you might want to move into a smaller property or one better suited to changing mobility needs.

Taking out equity release doesn’t always mean you have to stay in the same property, although if you do want to move, you’ll need to get agreement from your provider if you want your plan to continue so you should make sure you know what your options are.

Top tip: Check the provider’s policy on transferring your equity release plan to a new house or flat – there may be limits on eligible types of property you can move to.

4. You don’t know what inheritance you’ll be able to leave

Releasing equity from your home means you’ll be able to leave less of the value in your home for your beneficiaries, but you do have options when it comes to safeguarding some of your beneficiaries’ inheritance.

With a lifetime mortgage, you will release equity from the value of your home. When the plan ends, the capital you borrowed plus accumulated interest is repaid, usually – but not always – by the sale of your property. If you or your beneficiaries have other means to settle the debt, your home may not need to be sold.

Some lifetime mortgages, including the Saga Lifetime Mortgage provided by Just, have the option for you to pay off some or all of the interest in regular monthly payments, which means the debt to be settled at the end of a plan could be less than if you didn’t pay the interest, and the amount you can still leave to your beneficiaries will potentially be higher.

With a home reversion plan, you sell a share of your home to the provider. When the scheme ends and the home is sold, the provider is paid from the proceeds. Whatever is left over after the sale will still be inherited by your beneficiaries as you wish.

Top tip: Make sure you understand the details of what can be left to your beneficiaries as you choose your plan, and what part inheritance tax rules play.

5. You don’t know whether you’ll benefit from house-price rises

The type of equity release you choose affects the extent to which you or your beneficiaries will be able to benefit from future rises in house prices.

With a lifetime mortgage, you keep full ownership of your home, which means you could benefit from any increases in its value over time. The amount of equity you have taken from your home is a fixed amount that you will repay plus compound interest at the end of the plan. If your home sees a rise in value in the meantime, when it comes to sell the home you or your beneficiaries may benefit.

But with a home reversion plan, you sell a percentage, or all, of your home to a provider in return for the right to live in your home until you, or the last owner of a joint equity release plan, die or go into long-term care.

If, for example, the provider has bought 60% of your home at a set price when you take out a plan, they will take 60% of the value of the home when it’s sold, which could be significantly more. You or your beneficiaries will only benefit from price increases on the portion of the property you still own.

Top tip: Make sure the terms of your plan are very clear about what happens if your house increases in value and how that will affect your plan.

Understanding how equity release risks apply to your situation

It’s important that you get the right professional advice to make sure you can spot any equity release risk warnings. With the right advice and a good choice of plan and provider, you can minimise the risks of equity release and still see the many benefits that this approach to releasing value from your home has to offer.

Saga Equity Release, our advice service provided by HUB Financial Solutions Limited, can help you make the right decisions, and offers a wide range of advice that covers everything you need to consider before you go ahead. Saga Equity Release do not offer home reversion plans.

The product available through Saga Equity Release is the Saga Lifetime Mortgage, which is available exclusively through this service and is provided by Just. If after taking advice you decide to take out a Saga Lifetime Mortgage you'll need to pay an advice fee of £799. A lifetime mortgage is a loan secured against the value of your home.