Is equity release safe?
Equity release products are considered to be safe. Read our article to see why.
Key points
- There are a number of ways the financial services industry protects consumers when it comes to equity release.
- The Equity Release Council’s standards mean lifetime mortgage customers keep full ownership of their home and receive a no negative equity guarantee.
- The Financial Conduct Authority regulates equity release advisers and providers to ensure consumers are protected.
- Anyone considering equity release must speak to a financial adviser first, due to the complicated nature of the product.
There are two types of equity release – a lifetime mortgage or a home reversion plan. At Aviva, we offer lifetime mortgages to customers aged 55 and over, which allows you to borrow money against the value of your home through a long-term loan. While it could give you freedom to enjoy your retirement the way you’ve always wanted to, it’s a decision that needs to be carefully thought out. You’ll need to see a regulated equity release adviser before taking out equity release. They’ll help you work out whether it’s the right product for you, and whether your financial future is safe if you take it out.
When it comes to equity release, there are two organisations that make sure companies like Aviva are looking after their customers’ best interests.
The Equity Release Council
The Equity Release Council (ERC) is a trade body that safeguards consumers and promotes high standards of practice and conduct across the equity release industry. The ERC aims to help consumers to understand how equity release can help fund later-life care, support family or live a more comfortable life. Footnote [1]
Aviva is a proud member of the ERC and we’re committed to looking out for our customers and following the ERC’s standards and guidelines. There are a number of safeguarding measures for companies like us to adhere to when providing equity release.
Your home is yours for life
When you apply for a lifetime mortgage you must be mortgage-free or, be able to pay off a small remaining mortgage from the loan secured against your home. This means you’ll still own your home and we won’t force you to move out at any time, as long as the property remains your main residence for life and the terms and conditions of your lifetime mortgage are maintained. Our lifetime mortgage is repaid when you die or if you go into long-term care, subject to our terms and conditions.
With these types of rules in place, the ERC and its members help people take advantage of a lifetime mortgage while still retaining full ownership of their home.
No negative equity guarantee
Because we’re an ERC member, our customers get a guarantee of no negative equity. This is only when the property’s sold and there’s not enough money left to pay off the loan. For example, if you sell your home for £200,000 but you owe £210,000 on your lifetime mortgage, then you’ll only have to pay back what you get for your home – in this case £200,000.
This guarantees that neither you nor your estate will be responsible for paying back any more than your home can be sold for, providing it’s sold for the best reasonable price.
Other factors to consider
Equity release can be complicated, and it’s not for everyone. You need to consider lots of different factors, including that taking out a lifetime mortgage means you’ll leave a lower inheritance from the sale of your home. It can also affect your tax position and whether you can still claim certain welfare benefits.
Interest rates
Although there are no monthly payments to make, you can lower your outstanding balance by making one-off payments as and when you want. How this works depends on your provider and their terms and conditions. You'll build up interest for as long as you have the mortgage. Interest is added on the total amount you borrow as well as interest added over time, which can all add up quite quickly.
There are two types of interest rates – fixed and variable. A fixed rate never changes, while a variable rate can change at any time, but usually within set limits. At Aviva our lifetime mortgage comes with a fixed interest rate, so you don’t need to worry about this going up over time. This helps our customers to plan ahead with how much they’ll owe in the future.
With our lifetime mortgage, you can take out the initial lump sum and set up a cash reserve to borrow from in the future. This helps because you’ll only pay interest on the money that you take out, not the money left in the cash reserve.
If you do decide to take money from the reserve, then the interest rate applied to this will be what’s available at the time. This could be higher or lower than the interest rate we offered when you first took out our lifetime mortgage.
Moving home
It’s recommended to check whether your equity release provider allows you to transfer your plan to a new home. If not, this might leave you in a less flexible position for the duration of your lifetime mortgage.
With our lifetime mortgage, you can move home and take your policy with you. However, this depends on whether your new property meets our lending criteria at the time, and you’ll need to agree this with us. If your new home is worth less than your current one, you might need to repay some of the loan and interest. If the property doesn't meet our lending criteria you'll need to repay the loan and interest as well as a potentially substantial early repayment charge. Though you may be able to use our downsizing protection feature to repay the lifetime mortgage with no early repayment charge, subject to terms and conditions. We recommend speaking to a financial adviser before making any decisions on moving home with a lifetime mortgage.
In summary
To summarise, there are regulations and standards in place – set by the Equity Release Council and Financial Conduct Authority – to keep the equity release market safe for consumers. However, whether equity release is safe for you personally is dependent on your own specific circumstances. You must take financial advice from a regulated financial adviser before taking out equity release. They can go through all of the risks and considerations with you.
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