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If you own your own home and are 55 or over, equity release could provide you with a lump sum, additional income or maybe both. In this article, you’ll find out how the different types of equity release scheme work and what you should expect from firms that sell them.
What is equity release?
Equity release describes a range of products only available to you if you are older, typically over the age of 55. They allow you to release the equity (cash) tied up in your home without moving.
The products usually have no fixed term and allow you to stay in your home for the rest of your life, unless you have to move into long-term care, or if you break the terms of your equity release contract, for example if you let your home fall into disrepair.
Equity release schemes can be helpful in certain circumstances, but are not suitable for everyone. They can be expensive and inflexible if your circumstances change. They may also affect your entitlement to state or local authority benefits.
Equity release schemes are not the same as sale-and-rent-back schemes, which are very risky and should only be considered as a last resort.
Equity release - How does it work?
You can either borrow money, which is secured against your home (called a lifetime mortgage), or sell part or all of your home (called a home reversion scheme). This can give you a lump sum, a regular income, or both.
You’re more likely to qualify for an equity release scheme if you have no current mortgage, or if any mortgage you have is relatively small.
There may be a minimum amount you have to take. This depends on the scheme and the provider and could be, say, £15,000 or £25,000. But you may not have to take it all at once.
Types of equity release
They work differently and are quite complicated, so it’s important to get professional financial advice.
Equity release schemes – How are they regulated?
Firms advising on or selling equity release schemes have to be regulated by the Financial Conduct Authority (FCA), the UK’s financial services regulator, or be the agent of a regulated firm.
Regulated firms and their agents are placed on the FCA Register and have to meet certain standards.
You should check that the adviser you use is on the FCA Register, and that they have an equity release qualification to give advice. This means they have to meet certain standards and there are procedures to follow if things go wrong, including using the Financial Ombudsman.
Under new rules introduced in April 2014, all firms offering Equity Release products must offer you advice. This means making sure Equity Release is right for you and, if it is, only recommending a product that is suitable for you based on your needs and circumstances.
There are some lifetime mortgages where you will have to pay the interest on the loan and/or the capital every month. If this is the case, the new lending rules mean equity release providers will also have to check that you can afford these regular repayments.
You will have to show evidence of your income, such as pension statements and bank statements, and your outgoings, including other debt repayments, household bills and living costs such as travel, clothing, and entertainment.
Equity release firms - What the FCA expects them to do
Firms selling equity release schemes must make sure that advertisements, product brochures and other promotions are clear, fair and not misleading. This means that:
- The advantages and disadvantages of particular features of the equity release schemes have to be given equal prominence
- With lifetime mortgages, the firm must give the annual percentage rate (APR) whenever it provides any price information
- The adviser must check whether using the scheme will affect your tax bill and entitlement to benefits
- If there’s a fee for advising on or arranging your lifetime mortgage, the actual or typical fee must be quoted
If you think an advertisement doesn’t meet these standards above, let the Financial Conduct Authority know. You can call them on 0845 606 1234 or use their online form to report a misleading advertisement.
When you contact a provider or intermediary they must give you key messages about the service they offer. They may do this verbally or in a written document. Either way, they must confirm that they are giving you advice, and tell you whether they:
- Offer lifetime mortgages, home reversion plans, or both
- Offer equity release schemes from the whole market, or from a limited range of providers
- Will charge you a fee
Once they make a product recommendation they must give you a ‘KeyFacts about this lifetime mortgage or home reversion plan’ document (sometimes called a Key Facts Illustration) tailored for you. It will tell you, among other things:
- How much you want to release
- The value of your property
- The overall cost of the scheme, including any upfront fees and charges
- Who the provider is and a description of the scheme
- The rate of interest, if it’s a lifetime mortgages, and how it is charged (i.e. on a fixed or variable basis)
- What you’ll pay each month, if there are monthly repayments, and how much they would be if interest rates went up
- Any additional features
- What happens if you don’t want the mortgage or plan any more
When you’ve read this document, you should ask your regulated financial advisor if anything is not clear to you.
The information can also be used to shop around and compare schemes from other providers.