How equity release is putting its house in order

10th April 2021

Industry body the ERC is out to remake the image of equity release by offering protection from bad practice. And with the age of those drawing on their property’s value dropping, there’s even more demand for responsible, long-term expert advice

Equity release is a way of taking out a loan against the value of your property to provide you with liquidity - either as a lump sum or by drawing down cash as you need it. It’s generally only available to those aged 55 and over and is traditionally used as a way to help fund retirement, with your property helping to pay off the debt when you die.

It typically comes in two forms: home reversion, where you sell your property but have a legal right to continue living there; or a lifetime mortgage, where you take out a loan against the sale of the property in the future. Both options mean you can carry on living in your home and will have cash to fund your living costs - or whatever else you wish to use the money for.

With so many Britons having their wealth wrapped up in property, it’s an increasingly popular choice. Despite the uncertainty of Brexit and the disruption of a pandemic, £3.9 billion of equity was released in this way in Britain last year, on a par with 2019. The average age of those taking out equity release is dropping and it’s easy to see why it seems an enticing proposition, with interest rates at an all-time low and the feeling of security that comes with remaining in familiar surroundings.

“Some parents want to gift money to their kids to reduce tax inheritance”

However, Paul Saroya, director of Viva Retirement Solutions, says the motivations for equity release are widening: “Parents want to gift money to their kids with a ‘warm’ hand and reduce inheritance tax. Others are looking to pay off an interest-only mortgage. When people are coming to the end of their term, high street banks used to urge them to sell the property and repay the full principal of the loan. Lenders have introduced ‘lifetime mortgages’, so being forced to sell up doesn’t have to happen.” 

Equity release has been criticised for firms taking advantage of consumers’ need for cash. Examples of bad practice include properties being undervalued by equity release providers, so homeowners receive far less than they would have had they sold on the open market. Or customers taking out a lifetime mortgage only to find high rates of compounded interest swallow up their estate’s value, and with it their loved ones’ inheritance.

The good news is that the industry has become more transparent and responsible in recent years, led by the body set up to protect people from losing out with these schemes, the Equity Release Council (ERC). The ERC has drawn up a Statement of Principles, a set of rules and objectives, to ensure customers get a good deal, and all of its members have signed up to it. So the first step for anyone considering equity release is to check their potential provider is a member of the ERC.

For example, its regulations now mean you cannot be evicted from your own home irrespective of how acute your debt burden becomes. The ERC also guarantees that you will never pass on more debt than the value of your home - even if the property value collapses due to a housing market crash. For those whose changing financial fortunes mean they are in a position to pay off a lifetime mortgage early, the council is also working with banks and building societies to cap early repayment charges.

Releasing equity from a property still needs to be carefully thought through and alternatives considered, such as whether downsizing would be a better move, so a trusted financial adviser can be worth the fee here. However, equity release can also offer flexibility and choice and, through the ERC, the guarantee that you’ll never be forced out of your home. “That can never happen,” Paul says. “You’re free to live there until long-term care or death.

If you’re looking into equity release, consider the following steps

TAKE ADVICE

Consult an adviser specialising in equity release for an unbiased view on whether it’s your best option.

2. USE ACCREDITED PROVIDERS

Make sure your provider belongs to the Equity Release Council.

3. CHOOSE THE RIGHT FORM OF EQUITY RELEASE

Lifetime mortgage or home reversion scheme? It will depend on your circumstances.

4. BORROW IN STAGES

With a lifetime mortgage consider a series of smaller loans, to pay less interest over time. Try to pay off the interest as you go so it doesn’t compound.