Is equity release safe for homeowners?

Equity release is a major financial decision for homeowners aged 55 and over who wish to access the capital tied up in their property without needing to move home. While releasing equity can provide substantial tax-free funds, the crucial question for many is whether the process is truly safe. When handled correctly—by choosing providers who adhere to the strict safeguards set by the Equity Release Council (ERC) and ensuring mandatory independent financial and legal advice is obtained—equity release products, primarily Lifetime Mortgages, include robust protections designed to prevent key risks like owing more than the property is worth.

Is Equity Release Safe for Homeowners? Understanding Risks and Safeguards in the UK

The decision to release equity from your home involves balancing immediate financial needs against long-term consequences, particularly regarding inheritance and the total cost of borrowing. As an expert financial services company operating in the UK, Promise Money understands that safety in this context means transparency, compliance, and protection against worst-case scenarios.

The primary form of equity release in the UK market is the Lifetime Mortgage, where you borrow money secured against your home. Interest accrues (or ‘rolls up’) but the debt is typically only repaid when the last borrower dies or moves into long-term care. A much less common option is Home Reversion, where you sell a portion of your home to a provider in exchange for a lump sum, but retain the right to live there rent-free.

The Safety Net: Crucial Industry Standards and Guarantees

The safety of equity release products has significantly improved since the industry’s early days, largely due to regulation by the Financial Conduct Authority (FCA) and the establishment of voluntary but powerful industry standards by the Equity Release Council (ERC).

The Role of the Equity Release Council (ERC)

The Equity Release Council (ERC) is the industry body responsible for setting standards and practices for UK equity release providers, advisers, and solicitors. Choosing a product from an ERC member is one of the most important steps you can take to ensure safety and compliance.

ERC members commit to several crucial safeguards, including:

• The No Negative Equity Guarantee.
• The right to remain in your property for life or until you need to move into permanent long-term care, provided the property remains your main residence and you adhere to the terms and conditions of the scheme.
• A guarantee that you will receive fair and transparent terms.
• The guarantee that all customers must receive legal advice from a solicitor of their choice before proceeding.

When assessing whether an equity release product is safe, always confirm that the product, the provider, and the adviser are all members of the Equity Release Council.

The No Negative Equity Guarantee (NNEG)

Perhaps the most significant safety feature designed to protect homeowners is the No Negative Equity Guarantee (NNEG). This guarantee ensures that when your property is eventually sold, you (or your estate) will never have to repay more than the sale proceeds, even if the debt—due to rolled-up interest—exceeds the property’s value.

Without the NNEG, falling house prices or longevity could result in the debt consuming not only the entire value of the property but also potentially requiring other assets from your estate to cover the shortfall. The NNEG removes this risk entirely, providing peace of mind to homeowners and their families.

The Requirement for Independent Advice

For an equity release plan to proceed legally, you are required to seek independent financial advice (IFA) and independent legal advice. This mandatory step is crucial for safety.

Your IFA will:

• Assess your financial situation, goals, and alternatives (such as downsizing or Retirement Interest-Only mortgages).
• Explain the implications for state benefits and inheritance.
• Calculate the future cost of the compounding interest on your specific property value and age profile.
• Ensure the product chosen is suitable for your long-term needs.

Your independent solicitor will confirm that you understand the legal contract, including the terms, obligations, and consequences, before you sign anything. This two-pronged advisory approach is fundamental to ensuring the homeowner fully comprehends the commitment and risks involved.

Exploring the Potential Financial Risks of Equity Release

While industry standards provide protection against catastrophic loss (like owing more than the house is worth), equity release is a complex financial product that carries significant inherent costs and consequences that homeowners must understand before proceeding.

The Effect of Compounding Interest

The primary financial risk associated with Lifetime Mortgages is the effect of compounding interest, often referred to as ‘rolled-up interest’. Since payments are typically not made until the end of the term (upon death or entry into care), the interest is calculated not only on the initial loan amount but also on the previously accrued interest.

This means the total debt can grow exponentially over time. If a homeowner lives for many years after taking out the equity release, the total debt could significantly reduce the residual value of the home, potentially leaving very little or nothing left for beneficiaries.

• Example: A £50,000 loan at 5% interest could balloon to approximately £133,000 over 20 years if no voluntary payments are made.

Some modern Lifetime Mortgage products offer voluntary interest payment options (known as ‘drawdown’ or ‘serviced interest’) which allow you to mitigate the compounding effect and preserve more equity, increasing the safety margin for your estate.

Impact on Inheritance

For many homeowners, the greatest concern is the impact on the inheritance they wish to leave to their children or family. By releasing equity, you are guaranteeing that the property’s value available to beneficiaries will be reduced by the full loan amount plus all accumulated interest and fees.

If preserving a specific portion of the property’s value for inheritance is critical, some Lifetime Mortgages offer an Inheritance Protection feature. This allows you to guarantee that a fixed percentage of your home’s future value will remain untouched, regardless of how long you live or how much interest accrues.

Early Repayment Charges (ERCs)

Equity release plans are designed to be long-term commitments, typically lasting until the end of life. If you decide to repay the loan early—for instance, if you decide to downsize or pay off the debt unexpectedly—you will likely face substantial Early Repayment Charges (ERCs).

These charges can be considerable, sometimes amounting to tens of thousands of pounds, depending on the scheme structure and the interest rate environment at the time of repayment. It is vital to fully understand the terms under which you can repay the loan without penalty. Most ERC-compliant plans allow borrowers to move house and transfer the mortgage to a new property (subject to suitability criteria) without penalty.

Means-Tested Benefits Implications

The money released through equity release is generally tax-free. However, holding significant amounts of cash can potentially affect your eligibility for certain means-tested state benefits, such as Pension Credit, Universal Credit, or Council Tax Reduction.

If you receive or expect to receive such benefits, discussing the specific impact with your independent financial adviser is non-negotiable. Often, advisers recommend taking equity in smaller amounts (drawdown facilities) rather than one large lump sum, to manage capital levels and minimise benefit disruption.

When Does Equity Release Become Unsafe?

Equity release is generally safe when the established protocols are followed. However, risks increase significantly if:

1. Advice is Bypassed: Proceeding without mandatory independent financial and legal advice leaves you vulnerable to unsuitable products or misunderstanding complex terms.
2. Non-ERC Schemes are Used: Using non-ERC providers means you may not be protected by the No Negative Equity Guarantee or other vital safeguards.
3. Non-Compliance with Scheme Terms: While the NNEG protects against debt exceeding value, if you breach the contractual terms (e.g., failing to maintain the property insurance, performing major unapproved structural changes, or renting out the property), the plan could become repayable immediately, potentially leading to forced sale and financial distress.

Homeowners must maintain the property to a reasonable standard as required by the contract. While Lifetime Mortgages do not require monthly payments, they are secured loans. Failure to comply with the terms could lead to action by the lender, though repossession is extremely rare compared to standard mortgage default scenarios.

Considering Alternatives to Equity Release

Safety means choosing the most appropriate financial solution for your circumstances. Equity release is one option, but it is not the only way to access wealth later in life. Before committing, consider these alternatives:

1. Downsizing

Selling your current home and moving to a smaller, less expensive property often releases substantial capital while eliminating the need for further borrowing. This is typically the simplest and most cost-effective way to release equity, though it requires moving, which may not be desirable.

2. Retirement Interest-Only (RIO) Mortgages

RIO mortgages allow you to borrow against your property (typically up to age 80 or 85) but require you to pay the monthly interest. This means the loan balance never increases, safeguarding inheritance. The capital is repaid when the house is sold (upon death or moving into care). These require affordability assessments, unlike standard Lifetime Mortgages.

3. Utilising Existing Savings and Investments

Using ISAs, pensions (if accessed flexibly after age 55), or other investments might be financially less costly than releasing equity, especially considering the long-term impact of compounding interest.

Eligibility and the Application Process

For a Lifetime Mortgage, the eligibility criteria are straightforward, contributing to the product’s safety and transparency:

• Age: You must typically be 55 or older (the youngest homeowner must meet this age requirement).
• Property Value: The property must be in the UK and meet the lender’s criteria regarding construction type, location, and condition.
• Occupancy: The property must be your main and permanent residence.

The application process involves rigorous checks to protect the borrower:

1. Initial consultation with a qualified financial adviser.
2. Valuation of the property by the lender.
3. Offer issued, detailing rates and terms.
4. Mandatory separate legal advice conducted by your solicitor.
5. Completion of the agreement and release of funds.

This structured, advised process significantly reduces the risk of homeowners entering into an unsuitable arrangement.

People also asked

Can equity release negatively affect my children?

Yes, potentially. While equity release is safe in the sense that it won’t leave your estate in debt (due to the NNEG), it significantly reduces the residual value of the property, meaning there will be less or possibly no value left to pass on to your children as inheritance. This financial consequence must be discussed with all relevant family members before application.

Are the interest rates on equity release high?

Interest rates on Lifetime Mortgages are typically higher than traditional residential mortgages, reflecting the fact that the debt may run for many decades and no regular payments are required. However, fixed-rate products are available, and rates are competitive within the specialized equity release market, though they may fluctuate depending on the economic climate.

What if I want to move house after taking out equity release?

Equity Release Council standards dictate that you have the right to ‘port’ the plan—transfer it to a new, suitable property—without incurring Early Repayment Charges (ERCs). However, the new property must meet the lender’s criteria at the time of the move. If the new property does not qualify, you may have to repay the loan and face ERCs.

Is a Lifetime Mortgage better than a Home Reversion plan?

Lifetime Mortgages are far more common because you retain full ownership of your property, simply mortgaging it. Home Reversion requires you to sell a percentage of your property, giving up ownership rights to that portion immediately. Your independent financial adviser will recommend which, if either, option is suitable based on your goals and risk tolerance.

Does equity release impact my tax status?

The money released through equity release is considered a loan, not income, and is therefore tax-free. However, if the funds released are held in a bank account, they could generate interest income that may be subject to income tax. Furthermore, holding large cash sums could potentially affect your eligibility for means-tested benefits, which should be assessed by an adviser.

Final Considerations for Safety and Planning

The ultimate safety of an equity release plan rests on thorough planning and professional guidance. It is crucial to approach this decision not just as a quick fix for accessing cash, but as a long-term commitment that affects your financial future and that of your loved ones.

To ensure maximum safety and suitability, remember these three steps:

1. Choose ERC Members Only: Stick exclusively to providers and products that conform to the Equity Release Council’s rigorous standards, particularly the No Negative Equity Guarantee.
2. Involve Family Early: While not a formal requirement, discussing the implications with beneficiaries helps manage expectations and potential conflict down the line regarding inheritance.
3. Prioritise Independent Advice: Ensure your independent financial adviser is fully qualified in equity release and that your solicitor is separate from the lender, providing truly unbiased legal scrutiny.

Equity release, when taken responsibly and with appropriate professional advice, provides a regulated and secure way for older UK homeowners to utilise their housing wealth.