Little-known truths about equity release could benefit 1 in 3 UK homeowners over 55 by giving them a better understanding of how to access their property's value.¹ 

Many people remain unaware of the various options available or the potential risks involved, and this lack of information can result in missed opportunities or financial pitfalls. 

In this article, we aim to shed light on some of these less-discussed aspects to help homeowners make informed decisions.

Fundweb specialises in bringing you expert information on equity release in the UK, relying on expert insights and thorough research, thereby ensuring accurate and up-to-date information.

Let us dive in and learn more…

What Is Equity Release In The UK?

In practical terms, equity release in the UK allows homeowners to turn their property into a financial asset, providing a lifeline for various retirement needs.

What Are Some Little-Known Facts About Equity Release in the UK?

Equity release in the UK is a popular means for homeowners over 55 to access a portion of their property's value.

Yet, few know that the money received is typically tax-free and that there are two types: lifetime mortgage, where you retain ownership of your home, and home reversion, where you sell part or all of it.

Furthermore, it's not a requirement to make regular repayments, unlike a traditional mortgage, allowing for greater financial flexibility.

Less known is the 'no negative equity guarantee' that reputable providers adhere to, ensuring that you'll never owe more than your property's worth.

Additionally, there's the potential to ring-fence a portion of your home's value for future inheritance, a feature not extensively publicised.

Lastly, equity release can affect your entitlement to means-tested benefits, a possible downside that's rarely considered but important to be aware of.

Is it True That You Will Never Owe More Than Your Home's Worth?

Yes, you will never owe more than your home's worth with a No Negative Equity Guarantee, which is an Equity Release Council industry standard, especially for lifetime mortgages.² 

When your plan ends, typically when you die or move into long-term care, your property is sold, the proceeds are used to pay off the loan, and any residue is paid to your loved ones.

If your debt is more than your home’s value, the No Negative Equity Guarantee means your provider will cover the excess, so your family will not have to.

Can You Protect Your Inheritance Using Equity Release?

Yes, you can protect your inheritance because there is a feature available that allows you to set aside a portion of your property’s value for your beneficiaries.

Keep in mind, this reserved sum will be subject to estate taxes, and may come with extra fees. 

The guarantee will also lessen the total sum you are eligible to borrow.

For a comprehensive understanding, it is advisable to speak with a financial advisor.

Is Equity Release Only for Retirees?

No, equity release is not just for retirees; it is open to anyone 55 and older, whether you are still working or not. 

To fully understand your options, it is best to review eligibility guidelines and talk to a financial advisor.

Is It Possible to Relocate With Equity Release?

Yes, it is possible to relocate, as most plans allow you to transfer your loan to a new property if it meets the provider’s criteria. 

But remember:

• Early repayment charges (ERC) may apply when you move.
• If your new home is worth less than your current one, you may need to top up your equity release loan, which will increase your debt.
• The location and condition of your new home may affect whether you will be eligible for equity release or not.
• Before moving, budget for estate agent, legal, and removal costs.

Before relocating, ask your lender about terms and whether you can transfer your loan to a new property.

How Does Equity Release Impact State Benefits?

Equity release can impact state benefits because the money released may put you over the threshold for means-tested government programmes like Pension Credit, Council Tax Reduction, or Universal Credit.

Consult a financial advisor to find out more about this.

What Are Your Repayment Options with Equity Release?

The repayment options vary, bearing in mind that one of the cornerstones is that you do not have to make repayments until your plan comes to an end. 

However, you can make:

• Partial repayments: An Equity Release Council standard has been introduced where voluntary penalty-free repayments of up to 10% of the total value of lifetime mortgages taken from March 28, 2022.³
• Interest-only payments: Some plans let you repay the loan interest, leaving the capital amount unchanged.
• Full repayment: You can do this at any time, but early repayment fees may apply.

Repayment options depend on your equity release plan, so read the terms and conditions before signing up.

How Do Interest Rates Impact Equity Release?

Interest rates are pivotal, particularly because many associated rates are either fixed or capped. 

A higher rate has the effect of speeding up the accumulation of debt, which in turn has the effect of eroding the homeowner's equity more quickly. 

Lower rates, on the other hand, help keep more of the property's value to be inherited.  

That is why

Understanding compound interest is crucial: as debt accumulates, interest is charged on the increasing total, making it grow exponentially.

Are There Any Hidden Costs and Charges in Equity Release?

There are no hidden costs in equity release, but there are several fees and charges that you should be aware of before you take out a plan. 

These include:

• Cost of financial advice: Before taking out a plan, consult a qualified professional to understand the risks and benefits and decide if it is right for you
• Legal fees: A lawyer will draft the legal paperwork and make sure you understand the terms and conditions of your equity release plan, so you must pay legal fees
• Fees for valuation: Before signing up for an equity release plan, your home must be appraised to ensure a responsible loan
• Product fees: Most equity release providers charge setup and administration fees
• Early repayment charges (ERCs): If you repay your equity release loan early, you may have to pay an ERC, which changes depending on the lender and plan.⁴

Equity release fees vary by lender and plan, so compare plans and understand the fees before choosing one.

Common Questions

Conclusion

Homeowners can access the wealth locked up in their property through equity release, which is an important financial tool. 

While it provides several benefits, understanding how they work can make all the difference in ensuring homeowners get the most out of their assets. 

Talk to a qualified equity release advisor today to learn the little-known truths about equity release before taking this financial route.