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How to Spot Equity Release Companies to Avoid
Approached sensibly, equity release is a powerful and potentially life-changing financial product. It provides retired homeowners with a way to release the money locked up in their property for use on other things - from helping struggling family members to having the holiday of a lifetime.
Knowing how to properly assess any home equity release solution you are considering and how to avoid unscrupulous companies will make sure you make the right decisions with your home and personal finances.
At Clifton Private Finance, we work with a range of approved, regulated, and morally responsible specialist equity providers. With our experience you can be assured a safe and financially stable solution to your retirement financial requirements.
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What is Equity Release and How Does it Work?
Designed as a way for you to obtain funds that are tied up in your home without selling or having to move out, equity release represents a range of options tailored to different needs.
Each provides a solution that provides money today that is repaid to the provider upon your passing. With a few customised exceptions, equity release products do not require you to pay back a penny during your lifetime, with the balance of the loan cleared through the sale of your home upon your death or should you move to permanent residential care.
The 5 Types of Equity Release
Some of the more common equity release products include:
Lifetime Mortgage - The simplest form of equity release, a lifetime mortgage provides a lump sum that is repaid with interest upon your death (or other significant relevant life event).
HELOC - A HELOC, or Home Equity Line of Credit, is similar in structure to a credit card or overdraft with a credit limit that is tied to the value of the equity release. You can draw on it as and when needed and opt to pay back the balance for the first few years. As interest is only accrued on the funds withdrawn, a HELOC tends to generate less interest than a lifetime mortgage.
Drawdown Equity Release - A hybrid between a lifetime mortgage and HELOC, drawdown equity release provides funds in stages, as required. This has some of the interest saving aspects as the HELOC while otherwise performing as a staged lifetime mortgage.
Home Reversion Plans - A different structure to other home equity loans, a home reversion plan works by selling a percentage of your home today, with a contractual agreement that you can remain a tenant in your home for life. Rather than accruing interest, a home reversion plan has a return on investment for the lender through the increase in property value over the years.
Retirement Interest-Only (RIO) Mortgages - RIO mortgages are structured as a cross between a lifetime mortgage and a standard interest-only mortgage. With a RIO, monthly repayments to cover the interest are paid for as long as you wish, keeping the final interest accrued as low as possible. RIO mortgages can be converted to lifetime mortgages once you cannot maintain, or no longer wish to continue, the monthly interest payments.
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Understanding the Behind the Scenes of Equity Release
Whenever you enter into a finance agreement, it’s helpful to look at it from a business perspective and understand that no matter how friendly the lender, they’re not doing you a favour - they’re a business making money.
With equity release, the lenders return is based on their patience. Lenders don’t need their money today, and they are willing to sacrifice holding on to it in return for a little more when they do eventually get it back. They have no designs on your home, either, and are perfectly understanding that you need to live in your property for the remainder of your life.
As long as you keep a real understanding of how equity release works for both you and the lender, you will find it easier to avoid unscrupulous lenders who do not follow this core theory and motivation.
The Financial Cost of Equity Release
Most equity release products will generate interest during the term on the balance of the loan. As the interest is not repaid, this interest added will increase the loan balance and thus generate further interest (this is called compound interest). The longer the term, the greater the amount of accrued interest.
With equity release, the full balance of the loan (principal plus interest) is due for immediate payment when one of three things occur:
- Death of all borrowers
- All borrowers are no longer resident at the property (for example, moving to full-time residential care)
- The property is sold
Note that ‘all borrowers’ can (and often does) mean more than one person; a home equity loan taken out by a married couple will only become due when the last surviving party passes away. This provides additional security, for example, when one spouse outlives the other.
In most cases, the equity release loan is paid by the executor of the estate through the sale of the property, though it can be negotiated by the executor to be paid through another arrangement if desired.
To understand more about how repaying equity release works, read our comprehensive article ‘How Does Equity Release Work When You Die?’.
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The Importance of Due Diligence with Equity Release
Equity release is literally a lifetime product and any decisions you make regarding it will have an impact on any decisions you want to make regarding how you live for the rest of your life. There is also the financial impact that it will make on your heirs, which may cause emotional conflict and resentment.
For these reasons, it is essential that you take the time to think through your options with the appropriate seriousness, and to get advice from those in the know.
The majority of equity release providers are completely reputable and transparent with their terms and conditions, however there are exceptions and you could end up with constricting terms, unexpected fees, or unexpected negative financial impact on your family.
Working with Clifton Private Finance as your broker will help ensure that any end provider you obtain equity release from has been fully vetted and works with a clear business idea that is respectful and fully considers your personal circumstances.
We will help you understand the process so that you’re making an informed decision that avoids any untrustworthy companies.
The Equity Release Red Flags
There are a few telltale signs that an equity release provider is worth steering away from. Here are some of the red flags to watch out for:
- No regulation - All equity release providers in the UK must be authorised and regulated by the Financial Conduct Authority (FCA). The FCA provide an online public database, called the FCA register, that gives you direct access to verify a potential provider’s credentials. If the lender you are thinking about is not on the list, avoid them immediately.
- No Equity Release Council membership - The Equity Release Council is the industry body that sets the standards for equity release. One of the key guarantees of its members is the no negative equity guarantee which is essential in any ethical equity release product. Companies that are not members may not adhere to the standards and pose a risk to you and your family. All of the lenders we work with a Clifton Private Finance are members.
- Pushy sales techniques - Reputable equity release companies would never use any sort of forceful sales techniques to get you to agree. Telling you that you have to make a quick decision, or failing to take the time to fully explain the agreement are both signs that you should walk away. Companies with your best interests at heart will give you as much time as you need to reach a decision and will be willing to reassure you at every stage, explaining the contract in full before you sign.
- Attempts to avoid legal counsel - All equity release products must involve a period of independent advice from a solicitor. Any company advising you to skip or otherwise avoid this part of the process, such as by saying it adds extra unnecessary cost, is breaking the legal requirements of equity release and should be immediately rejected.
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The Equity Release Legal Advice Requirement
Unlike many other types of debt product, equity release has an important safeguard to help you make only informed decisions.
By law, you must consult an independent solicitor before signing any equity release agreement. The solicitor will ensure that you fully understand the terms of the contract, any costs associated with loan, and the potential impact on your future and your estate.
Your solicitor will:
- Explain the terms of the equity release agreement in language that you understand.
- Make sure that you fully understand the process of equity release.
- Discuss with you the long-term implications, including how it might affect your family’s future inheritance.
- Ensure that you are not under any pressure, either from your equity release provider or from other third-parties, including your family, and that you are entering into the agreement voluntarily.
If you do not already have a solicitor, we can recommend one, however it is important that you are comfortable with the solicitor’s reputation and independence.
As with when working with anyone involved in your finances, you should undertake your own personal checks to make sure you are happy with the companies you are working with.
Comparing Multiple Equity Release Offers
Do not jump into working with the first equity release provider you find. While they might end up being your final choice, it’s important that you look at multiple offers and compare these to see which is best for you. Your equity release package could differ in terms of:
- The loan value
- The interest rate
- Additional fees
- The final terms for repayment
- Terms regarding other residents
- Customisation such as ringfencing (protecting part of the property value from the equity release) or ongoing payments to reduce interest
Our partners will work with you to compare multiple providers from a wide pool of reputable UK finance companies. We will help you understand the different options available to you and assess the pros and cons of each product.
Equity Release with Clifton Private Finance
Getting trusted guidance is essential to make sure that your equity release is right for you. Working with experienced professionals helps you navigate the complicated equity release market, select a product that’s right for your needs, and understand all of the fine nuances that go into comprehensive equity release.
If you are looking at equity release as a way of unlocking the financial potential of your home, contact an expert at Clifton Private Finance today and let us help you get the safe solution that makes your retirement a relaxed and enjoyable time.
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