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Equity release may be an option for some homeowners who want to access money tied up in their property during retirement. However, it is a significant financial decision that can affect your future finances, inheritance and entitlement to certain means-tested benefits.
If you are considering equity release, it is important to compare the available options carefully, understand the costs and risks, and consider whether alternatives may better suit your circumstances.
This guide explains ten factors to consider when comparing equity release providers and products. SeniorWise is a lead-generation website that introduces consumers to third-party businesses offering specialist advice and services. SeniorWise does not itself provide regulated financial advice.
Key Takeaways
- Check the provider’s regulatory status and the qualifications and permissions of the adviser.
- Compare interest rates, fees, repayment features and the terms of individual products.
- Understand how compound interest may affect the amount owed and the equity remaining in your home.
- Check whether the product includes a no negative equity guarantee and whether inheritance protection is available.
- Consider the impact on means-tested benefits, your estate and future housing plans.
- Explore alternatives and obtain appropriate advice before making a decision.
1. Check the Provider’s Credentials and Equity Release Council Membership
Before considering an equity release product, check the provider’s credentials and the status of the adviser who will discuss your options.
The Financial Conduct Authority (FCA) regulates many firms undertaking activities involving regulated mortgage contracts and other financial services. You can use the FCA Financial Services Register to check a firm’s or individual’s regulatory status and relevant permissions.
You may also wish to check whether the provider is a member of the Equity Release Council (ERC). The Council has standards for its members and promotes consumer protections in the equity release market.
Membership should not be treated as a guarantee that a particular product is suitable for you or free from risk. Check the terms of the specific plan, the protections it offers and the credentials of the adviser before proceeding.
2. Understand the No Negative Equity Guarantee
Some lifetime mortgages include a no negative equity guarantee. Under the terms of a qualifying plan, this generally means that when the property is sold to repay the mortgage after the relevant conditions are met, neither you nor your estate will be required to pay a shortfall from other assets if the sale proceeds are insufficient to repay the amount owed.
The guarantee is subject to the particular product’s terms and conditions. Do not assume that every equity release product includes the same protection.
A no negative equity guarantee does not mean that your property value cannot fall, that you will retain a particular amount of equity or that an inheritance is guaranteed. Interest and other applicable costs can still reduce the equity remaining in your home.
Ask the adviser to explain the guarantee, its conditions and any relevant exclusions before making a decision.
3. Compare Interest Rates and the Total Cost of Borrowing
The interest rate is an important factor when comparing lifetime mortgages, but it should not be considered in isolation.
With a roll-up lifetime mortgage, interest is generally added to the outstanding balance. Unless repayments are made, interest can then accrue on the growing balance. This compounding effect can cause the amount owed to increase significantly over time.
When comparing plans, consider:
- The interest rate and whether it is fixed or variable.
- The effect of compound interest over different periods.
- Arrangement fees, valuation costs, legal fees and other applicable charges.
- Early repayment charges and the conditions under which they may apply.
- Whether voluntary repayments or interest payments are permitted.
- The projected amount owed and the equity that may remain in your property.
Ask for personalised illustrations showing how the balance could develop over time. Illustrations are based on assumptions and should not be treated as predictions of future property values or the exact amount that will eventually be owed.
The lowest interest rate does not necessarily mean the lowest overall cost or the most suitable product.
4. Consider the Flexibility of the Plan
Your needs may change during retirement, so it is worth checking what flexibility a product offers.
Some lifetime mortgages allow customers to release an initial lump sum and access additional funds later through a drawdown facility, subject to the product’s conditions and available facility.
With a drawdown arrangement, interest generally accrues on the funds actually released rather than on the entire unused reserve. This may reduce the interest accumulated compared with borrowing the same total amount at the outset, although the outcome depends on the timing of withdrawals and the product’s terms.
Check whether the plan permits further withdrawals, whether minimum withdrawal amounts apply and whether the available facility could be affected by future circumstances.
You should also ask about conditions for moving home, making repayments and changing the arrangement. Flexibility varies between products, and no plan should be assumed to suit every homeowner.
5. Review Voluntary Repayment Options
Some lifetime mortgages allow voluntary repayments, either towards the interest or the outstanding balance. These features can help borrowers manage the amount owed, but the rules differ between providers.
For example, a product may permit repayments up to a specified annual allowance without an early repayment charge. The allowance, calculation method and consequences of exceeding it depend on the product’s terms.
Before choosing a plan, ask:
- Are voluntary repayments permitted?
- What annual limits or other restrictions apply?
- Could an early repayment charge apply?
- Can you make regular interest payments?
- What happens if you miss a planned payment or exceed the permitted allowance?
Making repayments may reduce the outstanding balance and future interest accumulation. However, repayments should only be considered if they are affordable and consistent with your wider financial needs.
6. Understand Early Repayment Charges
Your circumstances may change after taking out a lifetime mortgage. You may want to repay the loan early, move to another property or explore a different financial arrangement.
Some products impose an early repayment charge if the loan is repaid in specified circumstances. The amount and calculation method can vary considerably.
Before committing, ask for a clear explanation of:
- When an early repayment charge may apply.
- How the charge is calculated.
- Whether it changes over time.
- Whether any exemptions or special repayment conditions apply.
- What happens if you need to move home or repay the loan sooner than expected.
Do not assume that charges will disappear after a set number of years. Check the actual terms of the product and consider how future changes in your circumstances could affect your options.
7. Consider Inheritance Protection
If leaving an inheritance is important to you, ask whether the product offers an inheritance protection feature.
Some lifetime mortgages allow you to ring-fence a specified percentage of the property’s value for beneficiaries. This can limit the amount of equity available to repay the mortgage, and the amount you can initially release may be lower as a result.
The effect on your estate will depend on the product’s terms, the amount borrowed, interest accumulation and the property’s eventual sale value.
Inheritance protection does not guarantee that the property will increase in value or that beneficiaries will receive a particular cash amount in every circumstance.
Ask the adviser to explain how the feature works and request illustrations showing how it could affect the funds available to you and the equity potentially remaining for your beneficiaries.
8. Research Providers and Read Independent Reviews
Customer reviews can help you understand other people’s experiences of a provider’s service, communication and administration.
When reading reviews, consider:
- Whether the reviews come from independent platforms.
- How recent they are.
- Whether there is a meaningful number of reviews.
- How the business responds to complaints.
- Whether the reviews relate to the provider, the adviser or an introducer.
Reviews are only one source of information. Positive feedback does not establish that a product is suitable for your circumstances, and negative feedback should be considered in context.
You should also check the firm’s regulatory status, relevant complaints information and the scope of the advice being offered. Make sure you understand who is responsible for advising you and who will provide the product.
9. Understand All Fees and Charges
The total cost of equity release may include more than the interest charged on the loan.
Depending on the product and circumstances, costs may include arrangement fees, property valuation fees, legal fees, advice fees and other charges. Some providers may offer incentives, but you should check their conditions and whether other charges still apply.
Request a written breakdown of the costs before deciding. Compare products on a consistent basis, taking account of the amount you intend to release, the expected duration of the borrowing and the features you need.
Also ask whether fees must be paid upfront or can be added to the loan. Adding fees to the loan can result in additional interest being charged on those amounts.
A product with a lower headline interest rate may not necessarily be the least expensive overall option.
10. Check the Impact on Means-Tested Benefits
Receiving money through equity release may affect your eligibility for certain means-tested benefits, depending on your circumstances and how the money is held or spent.
For example, changes to your savings or capital may affect entitlement to benefits such as Pension Credit or Council Tax Reduction. The precise treatment depends on the relevant benefit rules and your individual situation.
Before proceeding, consider seeking guidance from an appropriate benefits adviser or the relevant government authority. Ask the equity release adviser to explain the potential implications and where specialist benefits advice may be needed.
You should also consider the impact on your wider financial position, including your retirement income, savings, tax circumstances and plans for future care.
No provider can guarantee that equity release will leave your benefit entitlement unchanged in every circumstance.
Frequently Asked Questions
Is equity release too expensive? Could the interest use up my estate?
The overall cost depends on the amount released, the interest rate, fees, the length of time the loan remains outstanding and any repayments made.
With a roll-up lifetime mortgage, interest can compound over time. This may substantially reduce the equity remaining in your property and the amount available to your beneficiaries.
Ask for illustrations showing how the balance could grow over different periods, and consider the effect of different borrowing amounts. A drawdown facility or permitted repayments may help manage borrowing costs, but neither guarantees that a particular amount of equity will remain.
What if I do not understand the financial terms?
You should receive explanations that you can understand before making a decision. Ask questions about anything that is unclear, including interest calculations, fees, repayment conditions and the effect on your estate.
If you are considering a regulated equity release product, seek advice from an appropriately authorised adviser with relevant equity release expertise. Take time to review the documents and discuss the decision with someone you trust if that would be helpful.
SeniorWise introduces consumers to third-party businesses. The advice, if provided, will be the responsibility of the relevant advice firm.
Could my needs change after I take out a lifetime mortgage?
Yes. Your income, health, housing requirements and family circumstances may change.
Before proceeding, ask how the product deals with moving home, making repayments, accessing additional funds and other changes. These options are subject to the terms of the plan and the provider’s criteria.
Consider whether the arrangement leaves sufficient flexibility for your future needs and whether other options could be more appropriate.
Is equity release safe?
Equity release is a significant financial commitment secured against your home in the case of a lifetime mortgage. It is not suitable for everyone.
Depending on the product, the amount owed can increase over time, reducing the equity left in the property. Equity release may also affect means-tested benefits, inheritance and your ability to make certain future financial decisions.
Some qualifying lifetime mortgages include a no negative equity guarantee, but the precise protection depends on the product’s terms. You should not assume that all plans provide identical safeguards.
Consider the costs, risks and alternatives carefully and obtain appropriate advice before deciding whether to proceed.
Considering Equity Release? Compare Your Options Carefully
Equity release may be suitable for some homeowners, but it is important to understand the long-term implications before making a commitment.
You may wish to explore alternatives such as downsizing, using existing savings, reviewing pension income or checking eligibility for benefits and other support. The most appropriate option will depend on your circumstances and objectives.
If you would like to explore available options, SeniorWise can introduce you to third-party businesses offering specialist services. Before sharing your details, review the relevant privacy information and understand how your information will be used.
Any advice provided will come from the relevant third-party advice firm, not SeniorWise. You are under no obligation to accept a quote or proceed with a product.
Important information: This article is for general information only and does not constitute personal financial advice or a recommendation to take out an equity release product. Equity release can reduce the value of your estate, affect entitlement to means-tested benefits and involve interest and other costs. Check the terms of any product carefully and consider obtaining advice from an appropriately authorised adviser before making a decision.
