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Is Equity Release Worth It? Pros and Cons

Equity Release Worth it

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Is equity release worth it? If you have heard of equity release before, you’ll know that it allows seniors to access a lump sum payment and make no monthly repayments. 

But you’ll also know that when the time does come around to repay, it can be really expensive. So that leaves the question – is equity release worth it? We reveal the key details of equity release and answer this question among others. 

What is equity release and how does it work?

Equity release is a way of borrowing a lump sum against home equity for senior homeowners who often cannot get other types of personal credit due to their age. It is predominantly used as a way to fund retirement and improve the quality of later life. 

The homeowner borrows against their home with one of two types of loan, called a lifetime mortgage or home reversion scheme. Both of these loans do not ask the homeowner to make repayments but both debts also get bigger over time. They only need to be repaid in full once the homeowner passes away or moves into long-term care. This is done by selling their home and using the money to pay off the debt in one swoop. 

Read on to learn how you can release equity from your home with these two loans, and how they differ. 

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Lifetime mortgages vs home reversion plans

Lifetime mortgages and home reversion plans work differently, although they both do not ask for ongoing repayments and require the debt to be repaid in the same way. 

A lifetime equity release mortgage gives the loan and applies an interest rate to the loan, which also does not need to be repaid. The interest keeps building up each month and gets added to the total debt. Whatever this total amount is when the homeowner dies or moves into care is what will be taken from the property’s sale proceeds. 

On the other hand, a home reversion scheme will not charge the homeowner any interest. It simply provides the loan in exchange for a fixed percentage of the homeowner’s future property sale money. For example, you could receive 25% of your equity as a lump sum today but need to repay the lender 80% of your home’s market value when you die or move into care. 

How much money do you really get from equity release?

The amount of money you can get using either form of equity release will depend on your age, possibly the value of your property, other details about your home and the lender you use. 

In general, the best-case scenario allows homeowners to access up to 60% of their equity using a lifetime mortgage and up to 80% of their equity with a home reversion plan. This means if you owned a £150,000 property, you could take out £90,000 or £120,000 in the best scenario, respectively. Most people take out less than this and are advised to do so unless absolutely necessary. 

If you want a lifetime mortgage but need to release even more equity than what has been offered, you could consider using an enhanced lifetime mortgage which could allow this if you have poor health.  

What is equity release used for?

The money you release from your home can be used for a wealth of purposes and a combination of them. It is most often used for:

  1. A retirement income
  2. Home improvements
  3. Holidays
  4. Investments
  5. Private healthcare services

Some seniors decide to use the money as a gift for their sons or daughters, often to help them buy their own house or start a business idea. 

Not everybody qualifies for equity release!

Unfortunately, not everybody can qualify to apply to release equity with these loans. You must be at least 55 years old and sometimes younger than 85 depending on the lender. These age restrictions will apply to all applicants in the case of joint homeowners, such as a spouse or de facto couple. 

You can only release equity from your main residence considering the debt needs to be repaid when yous top living there (after you die or move into long-term care). This property should have no debts secured against it, including a mortgage. 

What is the catch with equity release?

Equity release is considered one of the most expensive loans on the market. The catch is thought to be that you end up paying x2 or more back for your loan in the end. For some people, this will not be a concern. 

Is equity release safe?

Equity release is safe as long as you use a lender that is authorised and regulated by the Financial Conduct Authority. This shows they are a legal lender in the UK and are not a scam company. You will also need to engage an equity release adviser from a company that is also regulated by the Financial Conduct Authority. 

Why does equity release have a bad reputation?

Equity release used to have a bad reputation because it was always seen as a con and the industry standards were lower, which have been enhanced thanks to the Equity Release Council. Today the reputation is much better.

What is the Equity Release Council?

A group was formed to improve the standards within this niche of finance and to give homeowners additional protection. The group is called the Equity Release Council and both advisers and lenders can join the group. When they do they must agree to stick to rules and guidelines. They agree to these rules because it makes their services and products more appealing to homeowners considering equity release. 

The negative equity guarantee and other assurances

One of the most beneficial rules from the council for homeowners is the negative equity guarantee. This is a guarantee that lenders must agree to that stops them from chasing unpaid debts after the sale of the property. 

For example, if you have a lifetime mortgage debt of £200,000 but your property only sells for £170,000, you would not be chased for the remaining £30,000 debt. Only the money raised from the property sale can be recovered by the lifetime mortgage provider. They cannot ask you, your estate or your estate beneficiaries to pay any shortfall. 

Common reasons why a lifetime mortgage debt may exceed the value of your property when it needs to be sold are:

  1. You had the lifetime mortgage for a long period and the total owed grew significantly
  2. The value of your home decreased over time
  3. A combination of a long-lasting lifetime mortgage and a decrease in the value of your property

Some other assurances you get from the council are the permission to move and take your equity release loan with you when suitable. And a guarantee that you’ll never be forced to sell in other situations except from the discovery of a fraudulent application. 

Is equity release worth it?

Whether equity release is worth it or not comes down to personal finances, situations and views. 

When you see how much it can cost to repay a lifetime mortgage or home reversion plan, you realise how expensive these loans become and instantly feel like equity release is a con or not worth it. 

However, there may be many people and situations that make equity release a fantastic option for seniors. Some examples include:

  1. When you have no children – if you have no children or anyone of significance to leave your estate to, equity release is an easier decision. The cost of repaying the loan )(after death) is not a concern because it will not detract from the value of your estate passing to a loved one. 
  2. When it will significantly improve your quality of later life – when the equity release loan will be used for something meaningful, such as private medical care when you are sick rather than a new car, it can be worth it despite the long-term costs. 
  3. When there are no other options – if you have exhausted other credit options and require the money for a specific reason, equity release can be even more worthwhile. 
  4. When it avoids having to sell your home to pay care home fees – the UK Government is trying to come up with ways to stop people from ever having to sell their home to pay care home fees. Equity release can sometimes do this on its own. By releasing money and using it to pay for at-home private care services, you could avoid having to move into a care home, and maybe therefore avoid having to sell your home. 

To help understand if equity release will be worth it to you, and to explore alternatives, you need to get equity release financial advice first! 

Where can I get equity release advice?

Equity release advisory services can be accessed through an independent financial adviser with experience in this niche, or through lenders directly. It is usually recommended to use an independent adviser who may be able to help you find the best equity release products on the market as well. 

Fees for financial advice can range from a commission of your loan amount when approved, ranging from 1-5%. But some charge a fixed fee instead of around £1,000 inc VAT, which can be cheaper if you plan on taking out a large cash lump sum. 

Only consider advice from a company that is authorised and regulated by the Financial Conduct Authority. 

Where can I get an equity release plan?

You can apply for an equity release product from a range of companies in the UK. Many of these companies deal exclusively with equity release (e.g. Pure Retirement), whereas others also deal with insurance, investments and other products in the finance industry (e.g. Aviva). 

You can apply for a small number of lifetime mortgages through UK banks, but many do not offer equity release products at all. One bank that does offer a lifetime mortgage at the time of writing is Nationwide. 

Does equity release mess with your pension?

Some people are worried that using either type of equity release will affect their right to receive a state pension, simply because they will be richer than they were before. However, the state pension is not a means-tested benefit and you will continue to receive it as normal after you release equity. 

Do you pay tax on equity release?

You do not have to pay any tax on the money you receive from an equity release product. Because there are no monthly payments these products do not feel like loans, but is important to remember that they are and must be repaid eventually. Loans in the UK are not subject to income tax or Capital Gains Tax (CGT). 

Equity release is tax-free for the homeowner, but if they were to give some of their loan away to other people, this money may not be tax-free cash for them. Financial gifts can still be subject to inheritance tax if they are given within seven years prior to the giver’s death. 

What is a drawdown lifetime mortgage?

A drawdown lifetime mortgage is the same as a standard lifetime mortgage but the homeowner does not receive their full loan payment at once. Instead, they take out an initial smaller lump sum and keep the rest of their loan in a reserve facility held by the lender. The rest of the money can be accessed when and if ever needed. At the time any additional money is withdrawn from the cash reserve, the latest fixed interest will be applied to this amount. 

Drawdown lifetime mortgages are a great way to help budget throughout retirement and to help save money on interest. If you take more than you need and let it sit in a bank account, the money is likely to be earning less interest in the account than the interest benign charged on it. Drawdown equity release is also an effective strategy to maintain eligibility for means-tested state benefits, which can be reduced or taken away if you have significant wealth in your bank account. 

How much does equity release cost?

The total cost of repaying equity release may cost more than double your initial loan. But it also costs to arrange and set up your loan. Considering all advice fees, potential legal costs and application fees, you should expect to pay around £2,000 to organise your equity release loan at a minimum. 

Check out our other lifetime mortgage guides for free!

Read our many other lifetime mortgage guides to get to know more about releasing equity as a senior homeowner. We discuss these products from all angles so you are equipped to make the right decision.