Dangers of Equity Release – What You Need to Know

Are you eager to learn more about equity release, specifically Aviva’s equity release plans? You’ve come to the right place. Each month, over 7,000 people trust our website to guide them on the topic of equity release. In this article, we’ll cover:

• What equity release is and how to get a realistic quote.
• The risks, such as the potential for growing debts.
• How equity release can change your estate’s value.
• The difference between lifetime mortgages and home reversion schemes.
• Alternatives to equity release.

We understand that equity release can be a puzzling topic. You might have heard about the risks and are not sure if it’s the right choice for you. We’re here to help clear up any confusion and provide clear advice. Our aim is to help you make the best decision for your situation. No fancy words, just simple facts.

Let’s dive in.

Is it safe to do equity release?

Using equity release schemes is safe as long as you engage an independent financial adviser first and only use an equity release provider that is legally operating, meaning they are regulated by the Financial Conduct Authority. 

Many of the pitfalls of equity release can be avoided by choosing a lender that is a member of the Equity Release Council (ERC). This is a body that asks all members to adhere to rules and guidelines that have been made to offer greater protection to senior homeowners. You’ll hear more about the Equity Release Council in this guide. 

Can you lose your house with equity release?

When you use a lender that is a member of the Equity Release Council, they must guarantee that you’ll never be forced to leave your home or sell it unless you enter into long-term care. 

However, there are a few other rare scenarios that may result in your home being taken and sold. These are:

1. You lied or committed fraud on your equity release application
2. You are not really living at the property anymore but have been avoiding telling the equity release company
3. You have purposefully stopped maintaining the property

The pitfalls of equity release

The first pitfall of equity release is using it when it is not the best option for you. For example, using any significant savings before deciding to release equity is usually more advantageous. Your financial adviser should ensure you make the right choice, and any mis-sold schemes can be complained about to the FOS.  

When you do have consultations with your adviser, it is important that you reveal all your plans and don’t conceal any information. Doing so could have disastrous and costly repercussions. For example, not telling your adviser you want to downsize in 10 years could result in an eye-watering fee that may have been avoided. 

If you do decide to use equity release, it’s important that you only release what is needed. Because the costs of releasing equity in this way are so high, you don’t want to overborrow. Using a drawdown facility can be helpful if you don’t know exactly how much you need to release. 

Another potential pitfall of equity release is not being aware of how your new wealth will affect entitlement to some state benefits. We’ve dedicated an entire section to this below‚Ķ

Can you lose access to benefits?

When you take out an equity release plan, the amount of savings you have will instantly increase. This can stop your eligibility to receive some means-tested benefits. 

You’ll still be eligible to receive a state pension, but those who received pension credits to top up their pension may no longer be eligible to receive a partial or complete top-up. 

For every £500 you have above £10,000 in savings, your pension credit payments decrease by £1. If you lose all entitlement to pension credit payments, you can simultaneously lose entitlement to a council tax reduction and some other benefits. 

By using a drawdown equity release plan instead of receiving a lump sum, you might be able to mitigate the amount you have saved at one time, which could protect your right to receive some means-tested state benefits. 

Can you move home with a lifetime mortgage?

The Equity Release Council states that all its members should allow homeowners to move to suitable alternative properties and take their lifetime mortgage with them. For a property to be seen as suitable, it must be of equal or greater value than the original property. But that’s not all – it must be just as easy to sell on the property market.

For example, moving to a home of equal value in the same town or city should be fine, but moving to an exceptionally remote location could cause issues because the new home might be harder to sell in the future. 

If you want to downsize to a different property with a lower valuation, this is usually possible but it may be costly. You may need to pay off some of the lifetime mortgage to be allowed to downsize, and this could trigger an early repayment charge. It is essential that you explain any downsizing plan when you receive financial advice. Your adviser may be able to secure an equity release agreement that excludes early repayment costs when paying off part of the mortgage within a downsizing process. 

Is equity release worth considering?

Equity release is worth considering for some people. If you have savings already and don’t have specific plans for the money you’ll receive, it could be a sign that releasing equity is an unworthwhile long-term expense. 

You should always seek independent financial advice from equity release experts to inform your decision. 

When is equity release a good idea?

Releasing equity is a good idea if you need cash in later life to live a more comfortable retirement and do not have enough savings already. The decision is made even easier if you do not have any children or grandchildren to benefit from your estate. 

The decision is not entirely a financial one, which means releasing equity is a very personal decision. 

Alternatives to equity release

An alternative way to access cash as a senior without using equity release is to sell your home and downsize to a smaller less valuable property. This could help you access some cash for retirement. 

But some negatives of this option is that moving can be stressful and you may have a sentimental attachment to your current family home.