If you’ve ever considered unlocking the value of your property through equity release, prepare for some good news.
The Equity Release Council (ERC) has introduced a new safeguard that could significantly reduce the cost of borrowing money on your home through equity release. So, what exactly is this safeguard? And when does it take effect?
What is equity release anyway?
Equity release refers to a range of financial products that let homeowners unlock the value in their homes in the form of cash. People who release equity from their homes typically do so for a variety of reasons. Some do it to boost their retirement income and others fund home improvements or finance a big purchase.
The most popular equity release product is known as a ‘lifetime mortgage‘. A lifetime mortgage is basically a loan that is secured against your home.
You can access the cash either in one lump sum or in small amounts when you need it. The loan plus any accrued interest is usually paid off through the sale of your home when you pass away or move into long-term care.
Lifetime mortgages can be quite costly. That’s because the interest is compounded, and the amount you owe can therefore grow significantly over time.
What’s changing with equity release?
According to a statement issued by the ERC, equity release providers will now be required to allow borrowers to make penalty-free repayments on their loans beginning from 28 March 2022.
Equity release customers will essentially be able to reduce their loan, as well as the interest on this loan, without having to make any ongoing commitment to further repayments.
Some service providers already allow customers to make penalty-free payments, which can reduce the total amount owed in the end. The new safeguard will now make this an industry standard. It means that all equity release customers, regardless of provider, will be able to reduce the cost of their loan by making partial repayments.
David Burrowes, chairman of the ERC, said that the new move “provides flexibility for consumers and ensures the sector continues to evolve to meet changing demographic needs”.
He added: “As recent years have reminded us, people’s circumstances can change, and customers who find they can use earnings, savings or an inheritance to reduce their borrowing in later life will be able to do so without incurring early repayment charges.“
What else do you need to know about equity release?
Equity release reduces the overall value of your estate, lowering the amount you can leave to your beneficiaries. Before pursuing this option, consider speaking with your loved ones to avoid any nasty surprises later on.
Equity release can also affect your entitlement to benefits such as pension credit and universal credit. Make sure you also take this into consideration before you take the plunge.
Keep in mind that there might be costs involved as well. For example, all lenders will likely require you to have buildings insurance in place. They will also typically need you to maintain the buildings insurance until the end of the equity release plan.
Other costs that you might need to budget for include legal fees, valuation fees and the lender’s admin fees.
Final word
The move to require all equity release providers to allow their customers to make penalty-free partial repayments is certainly welcome news for those considering this option.
Still, equity release is a big decision with far-reaching consequences. So, it might be a good idea to speak to a qualified equity release adviser before taking the plunge. They can advise you on whether equity release is right for you and help you find the best plan for your needs.
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About the author
Sean is a personal finance writer with a strong passion for helping others become more financially literate and make better financial decisions. He covers everything from credit cards to savings to investing.
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