Is equity release right for me?

This is the second entry in our equity release mini-series; don't forget to read the first post if you haven't already.

Equity release is when a lending company purchases a stake of your property so you can free up cash without moving home. Its appeal is largely in people who are house rich but cash poor.

Equity release had a PR disaster in the 1990s following a rise in house prices and a fall in share values, which put thousands of pensioners in negative equity. This has had a lasting effect on its reputation, but it's crucial to know that there have been huge developments in the market to safeguard consumers.

In the 1980s and '90s, the industry lacked much regulation. That is not the case today: the financial industry is very tightly regulated. The Safe Home Income Plans (SHIP) was a voluntary code introduced by some of the bigger lenders, and since then the trade body Equity Release Council has been established. The Financial Conduct Authority (FCA) also oversees the industry, so any firm advising on or selling equity release schemes need to be regulated by them. This means if you are considering equity release and want to know if you can place your trust with a specific company, you can take a look at the FCA register and see if it is listed.

In April of this year, new rules were introduced that mandated any firm offering equity release must provide advice, which is specifically tailored to individual circumstances. As they are regulated by the FCA, they have standards to meet and will be subject to the Financial Ombudsman in the event of something going wrong. This is a multi-layered safety net for the consumer, who can take comfort knowing that they cannot walk blindly into equity release, and they must deal with a regulated company that will face the scrutiny of the FCA and the Ombudsman.

The FCA regulations are strict, and state that any promotions must give equal prominence to both the advantages and disadvantages. Lending firms are also obligated to quote any fee for advice or arrangements of a lifetime mortgage, as well as state the APR with any price information. The Money Advice Service has a full breakdown of the requirements of lenders.

That's a lot of good news for anyone considering equity release. But, like any financial product, it isn't appropriate for everyone. Like pension release, you need to be at least 55 to be eligible for equity release. However, the average interest rate on equity release is between 6 and 7%. If you release money from your house at the age of 55 and remain in the property for 20 or 30 years, the loan to be repaid will be incredibly large if you have a lifetime mortgage, where the debt and interest snowball until the house is eventually sold, rather than a monthly repayment plan. On this basis, it is older people who tend to benefit the most from equity release.

Equity release should also be discussed with any family members, as they may be expecting to inherit the property. That doesn't mean you can't leave anything from the house though - modern introductions allow borrowers to ring-fence a specific amount of value to be protected, and many companies now have a protection against negative equity. This covers two of the main concerns with equity release, as it means homeowners are able to release money while still providing inheritance from the asset and with a guarantee against negative equity.

Another consideration is that equity release can, in some circumstances, result in means-tested benefits being reduced or stopped - although released equity may mean you no longer need those benefits. It's also important to remember that you will still be responsible for paying council tax as well as any repairs and maintenance on the home, not the lending company.

Whether equity release is right for you depends entirely on individual circumstances, but you need to think about why you want to enter it. There are many reasons, and 21% of survey respondents said it was to fund home improvements for care needs, which will be an increasing concern as people continue to live longer. A person funding their own care can relieve pressure on the family, especially women, who still face disadvantages at work due to typically being the primary caregiver of family members.

Equity release is experiencing something of a resurgence, with 36% growth in the past two years and over £1 billion released in 2013 alone. With strict regulations meaning homeowners must have financial advice before choosing an equity release product, it's safe to say that a lot of people have made the right personal decision in releasing money from their property.

There are pros and cons to equity release, but modern regulations have made it much more appealing and safer than it has ever been before.

Have you released equity from your house? Let us know in the comments below.

Call 0800 304 7288 for a friendly chat about your pension


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