Equity release schemes have become increasingly popular amongst older homeowners looking to supplement their retirement income, although some still worry about the safety of these plans.
According to the Equity Release Council, the trade body for the equity release sector, a total of £1.85 billion of property wealth was unlocked in the first half of this year alone, with 21,585 new plans agreed.
Here, we look at how safe equity release is, and explain why it’s vital to seek professional advice if you’re considering unlocking property wealth.
Are equity release schemes regulated?
Yes, both types of equity release scheme, lifetime mortgages and home reversion plans, are regulated by the Financial Conduct Authority (FCA).
Most equity release providers belong to the Equity Release Council too, which means provides consumers with additional safeguards. For example, members of the Equity Release Council must guarantee that their customers can remain in their homes for the rest of their lives, or until they move into long-term care.
Could you lose your home if property prices fall?
As long as you’ve taken out an equity release plan with provider who’s a member of the Equity Release Council, you’ll have the security of a ‘no negative equity guarantee’. This means that even if property prices drop and your home ends up being worth less than the amount of the loan, you’ll never owe more than the value of the property when it is sold.
What are the risks of equity release?
It’s important to remember that releasing equity from your home will reduce the value of any inheritance you want to leave, and it could affect your entitlement to some means-tested benefits.
You’ll also need to consider carefully the amount of interest that will need to be paid on any equity you unlock from your property. This is compounded, which means it is charged not only on the amount you’ve released, but also on any interest that’s been added to your debt.
Drawdown equity release plans, which are the most popular type of lifetime mortgage, can help you keep interest costs down. These enable you to unlock wealth from your home as and when you need it, so you’re only charged interest on the funds you’ve taken.
Do you have to pay tax on the equity you release?
No, any funds released via equity release are tax-free. However, if you put that money into a savings account or invest it, you may have to pay tax on any returns if they are higher than your personal savings allowance (PSA). The PSA is £1,000 if you’re a basic rate taxpayer or £500 if you’re a higher rate taxpayer. Additional rate taxpayers don’t have a PSA.
Equity release can help reduce inheritance tax (IHT) bills as unlocking property wealth reduces the value of your estate. Under current rules IHT is payable at a rate of 40% of the value of your estate above the £325,000 IHT threshold, or £650,000 for married couples and civil partners.