Pros and Cons of Equity Release – Complete Analysis

What are the pros and cons of equity release? 

We help you weigh up lifetime mortgages and other plans by discussing the advantages and disadvantages of equity release. If you are seriously considering this option, you should also seek professional advice from an independent financial adviser. 

But our guide is a great starting point. Keep reading to uncover the pros and cons of equity release. 

The Two Main Types

We’ve explained equity release from afar, but how does it work in regards to specific products? In the UK, there are two main types of equity release with a further type that just is a variation. These are:

1. Lifetime mortgage, Enhanced lifetime mortgage
2. Home reversion plan

Lifetime Mortgage

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product.

There is an enhanced variation of a lifetime mortgage where the lender accounts for health concerns with your application. If you are judged to have a lesser life expectancy based on how you answer a lifestyle questionnaire or due to medical history, you may be able to release more equity. 

Home reversion scheme

A home reversion plan is when an equity release company offers to give you a lump sum or drawdown facility in exchange for a percentage of your home’s future sale value. However, the amount offered will be well below what the home is worth. 

For example, you may get 20% of your home’s current value in exchange for 50% of its future sale price. This is instead of charging an interest rate. 

The Advantages and Disadvantages (extended list!)

To assist you in making a decision on equity release, we have listed the advantages and disadvantages of equity release below. Don’t solely rely on these to make your mind up. Source independent mortgage and legal advice as well. 

» TAKE ACTION NOW: Find out how much equity you could release

What are the advantages?

The main advantages of equity release are:

1. The sum of money you receive is tax-free and can be paid out as a single payment or as a regular retirement income (drawdown)
2. You may be able to access more equity if you have a shorter life expectancy
3. The money can be spent on any purpose or even given away
4. You continue living in your home without paying rent
5. Many lifetime mortgages allow interest to roll up without regular payments, but some require interest payments for a set period. Optional repayments, limits and any early-repayment charges depend on the contract.
6. A lifetime mortgage is usually repaid when the last borrower dies or moves permanently into care, subject to its terms.
7. For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.
8. Equity Release Council members also commit to the negative equity guarantee. The negative equity guarantee ensures that you never have to pay back more than the value of your home when sold. So if there is a shortfall, this isn’t payable from your estate or by estate beneficiaries. 
9. Sometimes, equity release can be used to mitigate the inheritance tax liability of your beneficiaries. But it’s not straightforward and you should seek advice first. 

What are the disadvantages?

The main disadvantages of equity release are:

1. Costs depend on the plan, rate, term, fees and repayments. Rolled-up interest can grow substantially, but debt does not necessarily double within a decade. Home reversion involves selling a share below its market value.
2. By choosing the convenience of quick cash and no repayments, you are significantly reducing the value of the estate you leave behind for loved ones, who may or may not need the money in the future.  
3. It can make moving home or downsizing difficult, although not impossible (more in the next section).
4. It’s really hard to go back on your decision and get out of a lifetime mortgage, especially considering early repayment charges can be eye-watering. 
5. The money you receive may reduce your entitlement to state benefits.
6. Further borrowing secured on the home may be restricted and requires the relevant lender’s agreement.
7. You’ll need to pay lots of fees for advice and solicitors. 

Is it a good or bad idea?

It’s not possible to say whether equity release is a bad or good idea because it depends entirely on personal circumstances. 

If you do not need additional money, equity release may unnecessarily reduce your estate. Inheritance-tax treatment depends on the estate and beneficiaries; the residence nil-rate band can be up to £175,000, subject to eligibility and tapering, rather than an automatic £150,000 increase.

But it could be a good idea if you want to make retirement more enjoyable or financially comfortable, especially if your estate beneficiaries are not relying on the money and assets you leave behind or you have nobody to leave them to. 

A wide range of (personal) factors must be considered when thinking about equity release. They can be worthwhile – or not.