Equity Release Advice

Equity Release, a safe way to borrow?

Is Equity Release a safe way to borrow?

The short answer to this question is that equity release is as safe a way to borrow as anything else since it is regulated by the FCA. The longer answer is that asking whether equity release is a safe way to borrow is asking the wrong question. What you should be asking is whether or not equity release is the right option in your situation.

A basic guide to equity release

There are two distinct forms of equity release home reversion and lifetime mortgage. With home reversion, you sell a stake in your home and when you die or move into permanent care, the value of the stake is calculated based on the market value of your home at the time of your death and the lender is paid the value of their stake out of the overall value of your estate.

With a lifetime mortgage, you borrow a sum of money using the current value of your home as security and then the sum borrowed plus interest is repaid out of the value of your estate either when you die or when you move into permanent care. These days there are numerous variations on this basic formula (for example, some lifetime mortgage schemes may allow you to “buy yourself out of the loan” early, although there may be a charge for this), but essentially this is how it works. Obviously, the longer you live after taking out the loan, the more you will pay in interest and this used to be one of the major issues with equity release.

Lifetime mortgages and negative equity

Let's say that you borrow £100,000 at an interest rate of 4% and you live for 18 years after taking out the loan. That means that at the time you die, your estate will owe £200,000. While this may seem like a massive win for the lender, there are two key points to keep in mind.

Firstly, you will have had the use of the money during this time, so, in principle, you could have used it to generate a better return (as, in theory, could the lender had they not lent the money to you). Secondly, your home may have increased in value by at least as much, which means that, all other factors being equal, your heirs will receive at least as much as they would have done had you not taken out the loan.

Having just said all that, from a purely mathematical perspective, it is entirely possible that you could end up in negative equity, especially with longer life expectancy (meaning loans can run for longer and accrue more interest). You therefore have to decide for yourself whether or not this is actually a concern for you. For example, if you have no heirs or are giving them their inheritance during your lifetime, then the issue of negative equity may be irrelevant to you. Your heirs can't be chased for your debts, your creditors only have a claim on your estate. If it is a concern for you, however, you can look for an equity-release scheme with a “no-negative-equity” guarantee. This basically means that your lender will only have a claim on the value of your home rather than on your estate as a whole.

Equity release and means-tested benefits

Another point to consider is whether or not equity release could impact your ability to access means-tested benefits. If this could be an issue for you then you might want to look at a drawdown option which essentially means that you get a line of credit to access when you wish, so you could look at benefits first and only tap into your equity if they were unavailable/insufficient. Going down this route could also reduce the interest payable since you would only pay interest on what you actually borrowed rather than on your available credit.

Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.