What Are the Risks of Equity Release?

Equity release carries several risks that one needs to be aware of.

One potential downfall is that it can reduce the value of your estate, as the money you owe grows over time due to interest accumulation.

Moreover, it might affect your entitlement to means-tested benefits, as the surplus cash can be seen as an asset.

Another risk to consider is that there are usually early repayment charges, which means that if you decide to repay the equity release plan early, it could be costly.

Also, bear in mind that releasing equity from your home might not be the most cost-effective way to raise funds.

If sold in the future, your property may increase significantly in value, so consider all options before deciding.

"How does equity release work?" This is a logical question for many homeowners, considering that around £6.2 billion was released in the UK through equity release schemes in 2022 alone.¹

But exactly how does it work?

The aim in this review is to demystify these products for you, detailing uses, property valuation, the role of conveyancing, short-term options, and more. 

Researchers have collated all the facts you need to empower in making the best decisions for you.

Read More: Equity Release Nightmares

How Do You Release Equity?

Equity release schemes are becoming increasingly popular in the UK as a means of funding retirement or supplementing income by accessing cash from the value locked into your home - you release equity. 

What Different Types of Equity Release Do You Get?

Yes, you can choose between 2 types:

• A lifetime mortgage
• A home reversion

However, it is essential to seek professional advice as these plans can be complex and affect your tax position and eligibility for means-tested benefits.

What Is a Lifetime Mortgage?

Lifetime mortgages, the vastly more popular product, enable you to extract a cash portion of your home's value at a capped or fixed interest rate. 

You can live in your house until you pass away or need to move into long-term care.

Only then the loan and the accumulated interest are due to be paid back to the provider, usually after the house is sold. 

A lifetime mortgage tends to be the product of choice for most customers.

What Is Home Reversion?

Home reversion differs from a lifetime mortgage in the sense that you sell a portion of your property's value to a home reversion provider.

You then receive either regular payments or a tax-free lump sum in exchange for the equity while still being able to live in your own house until you pass away or need to go into a long-term care facility.

What Is the Purpose of an Equity Release Calculator?

The purpose of a calculator is to give you an indication of the amount of cash you could potentially unlock from your home.

Most reputable providers will have a calculator on their website.

Why not try ours here for free?

How Does the Equity Release Process Work?

The process to release equity includes a number of steps that need to happen in a certain sequence.

The process works as follows:

• Initial consultation with a qualified expert.
• Completing the application and all the necessary valuations and checks.
• Receiving the offer.
• Consult with a solicitor to look at all the legal aspects of the process. 
• Completion and receiving your funds.

Learn More: A Comprehensive Guide on Releasing Equity

How Is Property Valuation Carried Out in Equity Release?

An essential aspect of the process is property valuation. 

A surveyor, usually from an independent firm, visits the property to determine its current market value. 

The valuation considers factors like: 

• The property's location 
• Size 
• Condition 
• Any improvements made 

The result of this valuation impacts the amount of equity you can release from your home.

What Role Does Conveyancing Play in Equity Release?

Conveyancing plays a crucial role, as it does in any property-related legal process. 

It involves preparing the necessary legal documentation, confirming the homeowner's legal ownership, and ensuring there are no issues that may prevent the cash release from going forward. 

A solicitor usually carries out this role, offering advice and guidance throughout the process.

Why and How Should You Review Your Equity Release Plan?

Keeping a regular review of your plan can help you adjust to evolving financial situations.

These can include:

• Changes in interest rates 
• Personal income
• The value of your property 

As the market evolves, new products and more competitive rates may become available, making it potentially beneficial to switch plans. 

A review also allows for consideration of any significant life changes, like health issues, which may warrant adjustments to your plan. 

While a review may reveal the desire to release more equity, it is essential to remember this could increase the final amount to be repaid. 

To navigate these complex considerations and potential costs of adjusting your plan, consultation with an adviser or broker is highly recommended.

What Should You Look Out for When Equity Release Offers Are Presented?

Look for the following:

• Interest Rates: When assessing offers, paying close attention to the interest rates is crucial. These rates can significantly affect the final amount that you or your estate will have to pay back. Note whether the interest is fixed, offering stability and predictability, or variable, which could potentially fluctuate, affecting your repayments. 
• Early Repayment Charges: Early repayment charges are another factor to consider as these could make it costly to switch plans or pay off your plan earlier than anticipated. 
• Flexibility: The product's flexibility is also important; options such as the ability to make interest payments, drawdown further funds, or transfer the loan to a new property can make a significant difference to your financial flexibility. 

Always consult with a professional, preferably one who specialises in equity release, to help decode the complexities and ensure you are getting a deal that aligns with your circumstances and long-term financial goals.

What Is the Process of Switching Equity Release Plans?

Switching plans typically begins with a comparison of various products on the market to identify potential plans offering lower interest rates or more favourable conditions. 

Once a more beneficial plan is identified, an application is submitted to the new provider, who would assess the application.

The provider will use criteria such as: 

• The applicant's age
• Property value
• Outstanding loan amount

Following approval, the funds from the new plan are used to repay the existing plan. 

This may sound straightforward, but it is crucial to remember the potential for early repayment charges imposed by the initial plan provider. 

These fees can be significant and should be factored into your decision-making process.

What Are the Implications of Remortgaging in an Equity Release Scheme?

In a remortgaging process, you can potentially switch to a plan with lower interest rates, thereby reducing the overall cost of your scheme. 

Accessing better terms could also mean getting more flexibility, such as enhanced inheritance protection or the possibility of making repayments. 

However 

Alongside early repayment charges, other potential costs such as new legal and valuation fees, as well as arrangement fees for the new plan, could also apply. 

These fees can add up, so it is essential to compare these against the potential savings or benefits of the new plan. 

Therefore, consulting with an advisor or a financial expert is advisable to comprehensively assess your situation and make an informed decision.

What Are the Pros and Cons of Equity Release?

Like with considering every major financial decision, it is essential for you to weigh up all the pros and cons before deciding if releasing property wealth is the right thing for you.

Pros to Explore:

• Cash to Spend: The biggest pro would be the tax-free cash you receive to supplement your income.
• No Moving: You can still live in your home, without the hassle of having to sell your house to unlock the equity.
• Transferring Your Plan: However, you can move house if you want to and transfer your plan to the new property if it adheres to the set terms and conditions of your provider.

Cons to Explore:

• Reduce Your Inheritance: Since releasing equity reduces the value of your estate, it will also make the inheritance you leave behind smaller.
• Affect Means-Tested Benefits: By receiving extra cash, it can increase your income and therefore your eligibility for means-tested benefits.
• Increase Debt: Compound interest can quickly add up and ultimately amount to a costly exercise.

It is important to seek professional advice to check if equity release is compatible with your personal and financial circumstances.

Common Questions

Conclusion

So, how does equity release work?

From the eligibility criteria, process duration, implications on benefits and inheritance, to alternatives and potential risks, every facet must be thoroughly examined. 

Releasing equity could offer a valuable solution for those looking to utilise their property's value during retirement. 

However, as with all significant financial decisions, seeking professional advice is crucial, especially if you need an accurate answer to: 'How does equity release work?’