Equity Release – What you Need to Know 

As someone who has worked in the equity release sector since 2010, I am often surprised by some of the confusion that still surrounds what equity release is, how it works, what the facts are, and what is a myth.  In this article I would like to deal with the key things to understand and give you some clarity of what a product like this entails. 

Equity Release – What you need to know 

In this article, we will cover: 

• The History of Equity Release 
• Types of Plans 
• What do Modern Plans Look Like? 
• Cost Examples 
• The Importance of Advice 
• What to Expect from a Good Advice Firm?  
• What an Advisor Expects from You 
• The Starting Point for Equity Release 

The History of Equity Release 

Equity release is an umbrella term for distinct types of plans (or financial products) designed to enable people in later life to access the equity tied up in their home.   Traditionally, people understand equity release to be an amount of money that you can access (release) from your property that has escalating costs added on, so the debt gets bigger as the years go by. This is not wrong; however, these escalating costs have taken on a variety of different forms over time from simply applying compound interest to charges based on the growth in property value.   The very first equity release plans were launched in the late 1960’s and up until 1991 there were no rules regulating the industry. One of the main drivers for regulation were the structures of these early schemes and the often high costs associated with them. As these early plans ended and the impact of them became apparent, the estates of people who may have originally released small sums, ended up owing massive amounts, and in some cases, the debt passed to their beneficiaries. This understandably led to negative news stories about equity release and this reputation stuck for years after.   There are very few of these early types of schemes still secured on people’s homes and although they did reputational damage to the industry, they ushered in positive changes. In 1991 The consumer protection group SHIP, (Safe Home Income Plans) was formed when the major providers decided to introduce a code of practice which had to be followed when advising clients on their plans. This has in recent years become the Equity Release Council (ERC). The ERC sets out standards for equity release Advisors and Providers to follow to qualify for the ERC ‘Kite Mark.’ They have also collaborated with the Solicitors Regulation Authority (SRA) to ensure that all consumers have set standards of legal advice and disclosures (called the SHIP Rules) when taking equity release.  The formation of SHIP and public pressure following the fallout of the early unregulated plans paved the way for a series of legislative changes from 1997 onwards, but it was a slow process. In October 2004, the FSA (now the FCA) took over the regulation of Lifetime Mortgages and consumer protections are now in UK law. 

Types of Plans 

There are two types of plans available today that can be classified as ‘equity release’.   The first is a Home Reversion Scheme. This is where you sell some or all your home to a Reversion Provider, who will then grant you a lease to live in the property for life (usually rent free). At one time, there were several Providers of this type of arrangement, however, they have reduced in popularity over the years and there are very few options remaining in this category. They are a less flexible product than is demanded by modern day consumers and consequently very rarely recommended to a point where they have almost died out.  The core of ‘equity release’ today is made up of Lifetime Mortgages which do ‘exactly what is says on the tin’, they offer consumers the option of putting a mortgage in place that you can keep for life, it does not need to be repaid until you (or the last survivor if you are a couple) pass away or move into permanent care and you do not need to make payments unless you want to. Any interest charged can add to the loan or ‘roll-up’ as it is known. There are several variants of these plans including options for buy to let lifetime mortgages and ones for second homes.  There is a third category of plans commonly known as RIO’s (Retirement Interest Only Mortgages). Technically, these are not equity release plans, they are closer in structure to a standard mortgage. You borrow an amount of money based on affordability (the income you have vs your expenses), and you make a payment of the interest every month. If you miss payments, then like a standard mortgage you could have your home repossessed. However, like an equity release plan, you can keep the plan for life and repay it from the sale of your property when you die or move out.   There are a range of specialist later life mortgages where Providers can lend on an interest only basis to people as young as age 50, however, and plans with a set term which means they will need to be repaid at some agreed point in the future.  Each of these plan types have pros and cons and which option will suit you best is determined by distinct factors, such as your situation now and in the future, your financial needs and circumstances, your age, property type and value, income, and other factors. This is where good advice comes into play. 

Modern Plans for Modern Times 

When discussing the most popular type of equity release plan (the Lifetime Mortgage), you will find that in recent times equity release plans have had competitive interest rates, (starting around 3% and fixed for the life of the plan) and moving up to around 6% at the higher end. This contrasts with older plans (where even a decade ago) the starting rate was typically around 6% or 7%.  The amount you can take is a based on the age of the youngest person on the deeds with a minimum age of 55. Age will determine the percentage of your property value that you can access, the older you are, the more you can take but only up to around 55%-60% at the higher end (e.g., £55,000-£60,000 on a £100,000 property). However, the more you borrow, the higher the interest rates tend to be.  Providers will need to be the ‘first charge’ on your property, meaning that if you have an existing mortgage, you will need to repay your existing Lender. This is one of the common reasons people seek equity release, as people are still entering retirement with interest only mortgages that have no endowment policy or other method repaying their loan, other than selling their home. In these cases, you can use funds from the equity release plan to repay your existing mortgage.  Plans can be a lump sum or a lump sum and drawdown, which means as well as an initial sum, you could have an amount of money set aside by the Provider that you can ‘draw’ from as needed, and you are charged interest only on the money taken. This is ideal if you do not need all the fund’s straightaway and can be a much more cost-effective way to manage the money you borrow. They have flexible options such as the ability to pay some or all the interest or interest and capital, which means you can control the cost to your estate. Some people prefer to allow the interest to be added to the loan and have their estate repay it along with the sum borrowed when they pass away, the benefit of this is obvious if you retire and have a lower income than when you were in work, but it does mean there will be less left for any beneficiaries.  Modern plans have many safeguards such as Downsizing Protection which can limit or remove the cost of any early repayment charges should you need to move in future, Inheritance Guarantees to ensure something is left for beneficiaries and Early Repayment Waivers which eliminate the payment of any charges should you want to pay the plan back after your spouse passes away or moves into care.   In addition to these protections, all equity release plans have a No Negative Equity Guarantee, which means in the event that all of your equity is used by rolled up interest, after you pass away, your estate will only have to pay back what your home can be sold for, and no debt is passed on to your beneficiaries. This was a key element introduced by SHIP (the Equity Release Council).  Not all plans have all features however, so understanding what you want and what is most important to you is vital. This is where dealing with specialist Advisor comes in handy. 

Cost Examples 

Allowing interest to roll-up obviously means that your debt will grow. As an example, a 70-year-old taking £25,000 and letting the interest compound for 15 years at 3.15%, accumulates a debt of £39,809 over that term. Alternatively, paying the interest on a voluntary basis would mean no interest is added and would cost around £66 per month.  The same £25,000 at 5.99% would cost approximately £59,829 when rolled up over the same 15-year term or cost around £125 per month if you voluntarily paid the interest. 

Get Good Advice 

The most important thing you can do when considering equity release is ensure you get skilled professional advice from an experienced person who fully understands the range of products and features available. At time of writing, there are over 800 plans and variations offering slightly different terms, interest rates, features, and amounts. Picking your way through all of this to ensure you get the right outcome is essential.   There are 3 important reasons to get advice: 

1. Equity Release Providers will require you to have advice before you can access any of their plans. Unlike financial products like ‘Car Insurance,’ you cannot just choose a plan ‘off the shelf,’ the process of getting equity release is closer to that of getting a pension plan, with a regulatory advice process with which you must engage. 
2. As we mentioned earlier, there are a vast range of variations in the plans, and as well as all the minor differences from one product to another, Providers also have criteria that your property and even your personal circumstances must meet to qualify for a plan, and not all Providers accept the same scenarios. This is where an experienced Advisor can help you to navigate through to a successful conclusion. 
3. There are potential downsides to equity release, such as the possible effect on any means assessed benefit entitlement or choosing a plan with the wrong type of early repayment charges. Again, a good Advisor can help you to understand any risks and even design a bespoke solution to help you mitigate them. At worst, having a good Advisor will mean that if you have to make compromises on the features of the chosen plan, you are at least able to make informed decisions about which ones, at best, they can stop you making expensive mistakes. 

What to Expect from an Advisor? 

A good advice firm should deliver in several areas. 

• Primarily, an advisory firm must be authorised to provide regulated advice which can be determined by checking the FCA Register, ask the firm for their FCA Reference Number. 
• They should disclose their Terms of Business upfront. This means, they will explain how they work, what their process is, what your rights are and tell you about any costs for their service.  
• They will take you through a professional and structured Advice Process. In short, they should:  

• • Gather information about your situation and circumstances including what it is you want to achieve.  
  • Conduct market research to see which plan (if any) is suitable for your needs. 
  • Explain exactly how the plan works and any risks with it. 
  • Provide you with a written report explaining everything they have told you. 

• Be able to manage the end-to-end process of delivering you a successful application. 
• The service you engage with should also be transparent and explain any information clearly and without using a lot of ‘jargon,’ allow (or even encourage) you to have a 3rd party involved in the process such as a family member or friend and be available to support you until you get your funds (and beyond). 

This is not an exhaustive list, but it covers the essential elements of good advice. One of the most important (and often overlooked elements), is just ‘getting on’ with the person you choose. Liking and trusting the Advisor you deal with will make the entire process a bit more comfortable for you. 

What Your Advisor Will Expect from You 

Advice is a two-way street, as well as your expectations from your chosen firm, your Advisor will need things from you. This is for three reasons, firstly as a regulated business, the FCA requires your Advisor to understand your situation before advising you, secondly, your Advisor needs certain information to ensure they can help you and thirdly, your Advisor needs to know details about you to make sure they recommend the correct plan.   This is what you should expect from your Advisor and what they will ask you: 

• Honesty and openness. Your Advisor will need you to be truthful about your situation and circumstances. If you do not disclose something vital, you could end up with the wrong plan or have your application declined by the Provider. 
• Expect to pay a fee at some point in the process. Different firms charge differently and some more than others. However, paying less is not always a bargain, consider the value of what you get. 
• An understanding of how much you want, what the funds are for, why you need them (their importance to you), and an idea of when you need them. This gives your Advisor a clear picture of your requirements and enough information to be able to answer any questions asked by the Provider, it will also enable them to advise on options of how you should take the funds. 
• An understanding of the alternatives you may have to equity release (or are considering). Do you plan to downsize soon, do you have money in savings, are you expecting any funds to come in? for example. 
• A clear picture of your finances, income, expenses, debts, and savings. 
• A clear idea of what your priorities are, what is important to you about the features of plan such as the ability to make payments, the timescale of any early repayment charges, or if you plan to move. An experienced Advisor will be able to help you with this and should prompt you on key questions. 
• Other details which include information about your property, your health, credit history etc. 

Once they have the information they need, they can fully research your options and present a solution which should meet your requirements, (or they may advise you to do something else instead if equity release is not suitable). Be prepared to spend a good hour with your Advisor exploring the things they need, its better to spend this time early on rather than going back and forth later. 

Where to Start 

Nobody wakes up one morning and thinks ‘I’m going to do equity release today’! So, the starting point with any journey must be the reason for it.   Whether it is to deal with debts, repay a mortgage, help family, improve your home or any other reason, take time to think about exactly how much you will need and if there are any other ways you can access those funds. Could you extend your current mortgage? Take a short-term loan? Ask family for help? Cut your living expenses or use savings? If the answer to these questions is no, then exploring an option like equity release may be viable but be honest with yourself.  Ensure you find an Advisor that you can trust, read Google Reviews, or ask friends for a recommendation, the Equity Release Council has a list of qualified Advisors who adhere to their standards that you could speak to, other specialist search engines like Unbiased can also be useful. Whichever way you find someone, take notice of how they interact with you and get to understand their process. It may be with a smaller firm, you will be dealing with the same people all the way through, with a larger firm you may have different teams who deal with things so you could have to deal with different departments, but you may benefit from a lower fee if they have economies of scale, what is your preference?  Read everything your Advisor provides and ask questions. Ensure you understand what is being proposed and do not be afraid to challenge something you do not understand. Consider letting a family member or friend support you by being involved in the process with you. A good Advisor will want to take time to thoroughly explain their recommendation to you, we sometimes misread information so give them that time to explain it to you properly so you can be clear about the facts.  Lastly, listen to your instincts. If something does not ‘feel right’ or does not make sense to you, then it may not be for you. Just because you can do something, it does not mean you should. This does not mean equity release is ‘right or wrong,’ ‘good or bad,’ it just means that it might not be a solution you are comfortable with, which is reason enough not to do it.   Think about your situation and what is important to you, also think about where you are emotionally, if you are recently bereaved, suffering from illness, or under financial pressure, you may not be in the best frame of mind to make these sorts of decisions. There is nothing wrong with taking a little time to think about it and get comfortable with things. Nobody who is in the business of giving good, regulated advice will pressure you into doing something for which you are not ready.  By Peter Huckerby (Cert CII (MP&ER) CeSRE. Peter Huckerby is a Director and Co-Owner of Lifetime Equity Release Ltd (FCA Ref 936736). He has worked in Financial Services since 2006 and been exclusively involved in equity release since 2010.  

* Please note, Interest rates change daily and the the figures used above are examples. Speak to an Advisor for a specific illustration based on your circumstances.