Understand the pros and cons of equity release and how avoid scams when using home equity for retirement cash.
Equity release lets older homeowners unlock the cash tied up in their property. But with lots of confusing financial jargon and horror stories of people losing money, there are some legitimate concerns that equity release is just an expensive scam.
Well, is it? In short, no – but you’ve got to have your wits about you. Here, we look to separate the facts from the fears.
What is equity release and how does it work?
Equity release allows homeowners aged 55 and over to access the value locked up in their house as a tax-free lump sum. There are two main types:
- Lifetime mortgages - This works like a normal mortgage but in reverse. You get a loan secured against your home which doesn't need to be repaid until you die or move into long-term care. No monthly repayments are made; instead the debt rolls up with interest over time.
- Home reversion plans - You sell all or part of your home to a provider, usually at below market value. In return you receive a lump sum, or smaller sums over time, and retain the right to live there rent-free for life. When you die or move out, the property is sold.
Younger equity release customers can usually only draw down a smaller percentage of their property's value. The older you are, the more cash you can typically unlock.
LiveMore do not offer Home Reversion Plans.
Why is equity release perceived as a potential scam?
Equity release has attracted suspicion over the years due to:
- Cashing out too early - Releasing equity from your home in your early retirement years can significantly reduce the legacy you leave behind. Depending on your circumstances, this may not be in your best interests.
- Lack of transparency - Plans can have unclear terms and conditions around fees, interest rates and charges. Without fully understanding the small print, it's hard to grasp if it's a good deal.
- Pushy sales tactics - Some advisers have pressured older customers into taking out expensive equity release products that weren't suitable for their needs.
- No guaranteed inheritance - Once signed up, guarantees that you'll be able to leave a certain amount of equity behind for your beneficiaries are hard to come by.
- Risk of house value changes - If the value of your property falls, your beneficiaries may be left with little or nothing when it's eventually sold.
- Scams - Unfortunately there are some unscrupulous providers aiming to take advantage of older people through equity release scams.
However, when used appropriately, equity release can provide older people with a useful cash lump sum during retirement. Let's look at how to avoid becoming a victim of a scam.
Tips for spotting an equity release scam
- Get impartial guidance - Speak to qualified sources like MoneyHelper or Citizens Advice for unbiased information before committing.
- Only use a regulated provider - Check the company is authorised by the Financial Conduct Authority (FCA) and be cautious with overseas firms.
- Don't be rushed or pressured - Take your time reviewing plans from different providers before deciding.
- Look at alternatives to equity release - Would downsizing, using pension savings or an annuity loan be preferable alternatives to equity release?
- Understand the small print - Seek clarification from a legal professional on any terms and conditions you're unsure of.
- Consider inheritance implications - Discuss any impact on assets beneficiaries might receive with your family.
- Seek financial advice - Paying a small fee for some equity release advice could save thousands down the line.
The bottom line: equity release requires caution
Equity release pros and cons need careful weighing up. It can provide a large cash sum in later life. But without professional advice and meticulous reading of the fine print, you may risk making an expensive mistake.
Getting regulated financial guidance and taking things slowly reduces the chance of falling for a scam. Used prudently alongside other retirement income sources, equity release can offer older homeowners useful financial flexibility. But you should enter with your eyes wide open about both the advantages and disadvantages of equity release.
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