Suitability Factors When Taking Out Equity Release
Equity release has become an incredibly popular option for people who are in later life financial planning.
For many homeowners up and down the country, equity release offers a practical way to unlock cash and wealth without the trouble of having to move house.
However, it is important to understand that equity release is not for everyone. Equity release is a long-term commitment that can shape finances, lifestyle choices, and family outcomes for years and years to come.
This is why everyone who applies for equity release is checked in terms of suitability. Regulations require all advisers and lenders to take a good look at their client’s current position and personal circumstances.
They are encouraged to look at their motivations, priorities, and the possible consequences of taking out an equity release loan.
For example, those who live in their home for a number of years have emotional ties to their family home, which means that they might not want to move in later life.
This plays a huge role in determining whether or not an individual should move home and downsize or remain in their property and opt for equity release.
This article explores the most important suitability factors when it comes to taking out an equity release loan, and how advisors can help homeowners and their families understand what should be considered before making such an important decision.
Understanding Suitability Factors When It Comes to Equity Release
When it comes to equity release, suitability goes far beyond just eligibility. With equity release, there are a number of age thresholds, property value limits, and ownership rules that determine whether or not equity release is available to you.
However, suitability factors focus on whether equity release will genuinely work for you in both the long and the short term.
When it comes to equity release, all advisers are required to examine some of the following. They are required to examine the homeowner’s attitude towards homeownership, their desire to leave an inheritance as well as their life expectancy and their current health condition.
Likewise, the equity release adviser will need to look into the homeowner’s expectations about their property price and how the funds will be released to them.
If you are considering taking out an equity release loan, then it is important to understand that these discussions are not just a box-ticking exercise.
Equity release can improve quality of life significantly. However, it also reshapes the future inheritance you might be able to leave, and lasts for the rest of your life or until you go into a care home.
Below are just some of the suitability factors that your equity release adviser will be considering upon meeting you and discussing your desire to release equity from your home.
1. Emotional Attachment to the Home
If you are considering equity release, then it is likely that you have lived in your home for a number of years. This likely means that you have a strong emotional attachment to your home and the things within it.
For most people, a home is never just bricks and mortar. For the majority of older homeowners, their home represents security, independence and family memories. Emotional attachment is, therefore, incredibly important when it comes to whether or not equity release is right for you.
This is particularly important when considering whether or not a home reversion plan is right for you, where full or partial ownership of the property is transferred to the equity release lender.
Giving up legal ownership of your home can be incredibly uncomfortable, especially if you have lived there for many years and you have raised a family in that home.
Even though the right to remain in the property for life is protected when it comes to equity release plans, some individuals struggle with the idea of no longer being the owner of their property on paper.
It is also important to consider that lifetime mortgages can also affect your emotional security. While you remain the full owner of your property, the property will be sold in the future to repay the equity release loan in full once you pass away or move into a care home.
This means that your home will not be given to your children or next of kin for inheritance. For those homeowners who feel strongly about passing their home onto their next of kin, whether that be children or grandchildren, this reality must be fully understood from the very beginning.
2. Inheritance Planning
One of the most common concerns that people have when considering equity release is about their inheritance. Unfortunately, all equity release loans reduce the amount of your estate to some degree, therefore having an impact on the amount of inheritance that you are able to leave.
Remember, you have to repay the equity release loan using the proceeds from the sale of the house, which you have to sell once you move into a care home or pass away [2].
Instead of going to your loved ones, the proceeds from the sale of the house will pay off the initial equity release loan, including any interest that has built up over the years
With it comes a lifetime mortgage; if death occurs in the early years, the amount owed back may not be dramatically higher than the original borrowing amount. If this were to happen, then the estate may still retain some of its value.
However, if your loan continues for a longer period, compound interest can grow significantly. While rising house prices may help with some of this, the eventual inheritance is still likely to be lower than it would have been without equity release.
3. Affordability Test
Affordability plays a huge role when it comes to equity release, especially compared to traditional and pre-existing mortgages.
When it comes to lifetime mortgages, some lifetime mortgages allow or even sometimes require regular early interest repayments which will keep the compound interest at bay.
If clients opt for this, then they must be confident that their income will comfortably support these payments over time, even if their circumstances change [1].
While many products offer flexibility, missing one of these payments can create a lot of stress and potential complications later down the line, which you will want to avoid as much as possible.
4. Set Up Costs
If you are considering taking out an equity release loan, then you might want to also consider the associated set up costs. Regardless of the type of product that they opt for, those wanting to release equity release from their home should factor in set up costs linked to equity release.
These could include things such as legal fees, equity release adviser fees, home valuation costs and any additional administration fees [1].
Understanding these costs early on in the equity release process avoids surprises or disappointment later down the line, and helps customers to decide whether equity release might work out best financially for them.
Other Things to Consider Regarding Equity Release
Security is often one of the strongest reasons people explore equity release. Unlocking property wealth can transform daily life, making retirement more comfortable and flexible. However, this benefit must be balanced against the long-term nature of the arrangement.
1. The No Negative Equity Guarantee
For those people considering a lifetime mortgage, then they will benefit from the no negative equity guarantee. This is offered by members of the Equity Release Council and provides a lot of reassurance.
The no negative equity guarantee means the amount you owe will never exceed the value of the property when it is sold, even if compound interest has built up the overall loan amount significantly [2].
This means that if you were to sell the property and the proceeds from the sale does not cover the loan amount, then your loved ones will not find themselves responsible for paying off the difference. Instead, the lender will step in and pay up.
2. The Risk of Default
For products that involve you having to make voluntary repayments, there is always the risk that the client might struggle to maintain these payments later in life, after they retire. There are a number of factors that might make it difficult to make these repayments, including potential health issues, reduced income, or the rising cost of living.
3. Personal Circumstances
Finally, equity release products are designed for older homeowners, over the age of 55 years. However, there are a number of suitability assessments that consider a wide range of personal factors, not just your age.
These could include your health, your life expectancy, your legal capacity to enter a legal agreement, whether or not lasting power of attorney is needed and your ability to continue to maintain your home and its condition.
Likewise, whether your property is a freehold, leasehold, or commonhold will have a huge impact on whether or not you are considered for equity release.
Whether or not you have a pre-existing mortgage will also impact your suitability, as those with a pre-existing mortgage might have to repay the remainder of their mortgage with the loan that they receive before being able to spend the equity release loan on anything else.
In addition to this, whether or not you have anyone else living in the property will have an impact on whether or not you are approved for an equity release loan.
Anyone living in the property who is not part of the equity release loan may be required to waive their rights of residence. This can cause huge issues in the family, and your equity release adviser will be making an assessment on this.
Conclusion
To conclude, equity release can be a fantastic financial tool when used in the right way. Equity release can be used in a number of different ways and can be spent on a number of different things including home improvements, helping family and friends as well as simply improving your standard of living.
However, it is important to understand and respect that equity release simply is not right for everyone and that there are a number of suitability factors that will be taken into account before you are either approved or rejected for equity release.
As discussed above, these are a number of different emotional factors, family circumstance considerations, inheritance considerations, whether or not you have a pre-existing mortgage and your personal attitude towards debt. All of these different suitability factors have a huge impact and will be carefully considered.
A thorough suitability assessment led by your equity release adviser will bring these factors together, helping homeowners make decisions they can live with, both financially and mentally for both now and in the future, for years to come.
References
[1] https://www.equityreleasecouncil.com/what-is-equity-release/
