personal finance

5 poor equity release deal warning signs

Equity release can be a good way for older people to benefit from some of the value locked up in their homes without having to move to a smaller property. 

But signing up for an equity release deal is a significant commitment, and it is important to do your homework in advance to ensure you know how the scheme works and whether it is right for you.

What is equity release?

Here are five warning signs that should give you pause before you agree a deal.

1. You don’t have a “no negative equity”guarantee

On a type of equity release plan known as a lifetime
mortgage, interest is charged on the money you borrow against the value of your home. 

This interest mounts up over the years and is only repaid when you die or move into long-term care.

But most reputable providers will offer a “no negative equity” guarantee, which means the amount of interest plus capital you owe can never exceed your property’s value. Check that this guarantee is offered on any scheme you are considering.

If the provider is a member of the Equity Release Council they have to adhere to a set of standards, one of which includes the no negative equity guarantee.

The pros and cons of equity release

2. You haven’t consulted your family

Taking out equity release on your home is likely to have an impact on the inheritance you will be able to leave to your relatives (see point 4, below). 

As such, it is worth considering discussing your plans with them before deciding on a course of action.

A good adviser will allow and even encourage you to have a family member present at meetings.

What happens to debt when someone dies

3. You don’t know if you’ll be able to move house

While you might be happy in your home at the moment, as you get older you may need to move to more suitable accommodation, for example a bungalow or retirement village. 

Check your provider’s policy on transferring
your equity release plan to a new house or flat – there are often limits on what type of property customers can move to while carrying on with their equity release deal.

Top tips for downsizing your home

4. You don’t know what inheritance you’ll be able to leave

As mentioned above, releasing equity from your home will diminish the inheritance you will be able to leave. But find out what your options are when it comes to safeguarding some of the value of your home for your family.

Inheritance debate: Leave children your money or spend it?

With a home reversion equity release scheme, you sell a share of your home to the provider. When the scheme ends and the home is sold, the provider is paid out of the proceeds but your family will be able to inherit the rest.

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5. You don’t know whether you’ll benefit from house-price rises

The type of equity release scheme you choose affects the extent to which you or your family will be able to benefit from future rises in house prices. 

With a lifetime mortgage, you retain full ownership of the home and benefit from any value increases.

But with a home reversion scheme, you will only benefit from price increases on the portion of the property you still own.

10 things you should know before your house goes on the market

It is important to get the right advice and ensure you speak to a qualified specialist equity release adviser. To find out more, click here: Saga Equity Release.

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