Pros and Cons of Equity Release – Complete Analysis
For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.
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.
What is equity release?
Equity release is a way for senior homeowners to access a tax-free cash lump sum or drawdown facility by releasing some of their home equity. However, unlike other home borrowing methods like home equity loans, no repayments are ever required.
Sounds too good to be true?
You receive the money and continue living in your home without being forced to make principal or interest repayments. The loan is only repaid when your house is eventually sold. You cannot be forced to sell your home while you still reside there. It will only be sold if you move into long-term care or after you die (from your estate).
FREE Credit Report FOR LIFE!
I’ve snagged a deal for you..
Spot errors that could be ruining your credit report
Simple actions to improve your credit score
Better score, better deals
Who can use equity release schemes?
To be eligible to apply for an equity release plan, you must meet the individual lender’s eligibility criteria. This typically involves:
- Being of a certain age, usually between 55 and 65. If you want to apply to release equity as a couple and joint homeowner, both of the pair must meet the age requirement.
- The home must be your main residential home with no existing first charge mortgage, or in some cases, a very small existing mortgage.
What is the catch with equity release?
If you take the time to understand equity release products and only consider options from companies that are authorised and regulated by the Financial Conduct Authority, there isn’t a catch in the sense of it being a con.
Getting professional advice isn’t just important, it’s usually mandatory.
Others will argue that the ‘catch’ is that you can end up paying a lot of interest or receiving much less for what your equity is worth in the end, which then influences how much inheritance you leave behind. This is one of the disadvantages of equity release rather than it being something to catch you out.
Is equity release worth considering?
If you are over 55 and want to access tax-free cash without having to pay it back each month, equity release is certainly worth considering. There are pros and cons of equity release, and only by fully understanding them and weighing up the facts will you know if it is the right move for you and your family.
You should start by learning about the different types of equity release…
Equity release in detail
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:
- Lifetime mortgage
- Enhanced lifetime mortgage
- Home reversion plan
- Lifetime mortgage
A lifetime mortgage allows you to release some of your home equity as a lump sum or drawdown, based on the current value of your home. This amount is subject to a fixed rate of interest, with the amount of interest owed rolling up each month and adding to the total owed. You may be allowed to make voluntary interest payments to rescue your debt. The debt is only repaid when your home is sold.
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 pros and cons of equity release (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.
What are the advantages of equity release?
The main advantages of equity release are:
- 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)
- You may be able to access more equity if you have a shorter life expectancy
- The money can be spent on any purpose or even given away
- You continue living in your home without paying rent
- There are no monthly repayments unless you opt into them
- You only pay back the debt when you die or move into long-term care
- Equity Release Council members guarantee you will never be evicted for normal reasons
- 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.
- 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 of equity release?
The main disadvantages of equity release are:
- No matter what scheme you choose, the total cost of equity release is unattractive. Even low interest rates over a decade will double your debt. And home reversion plans are not favourable either.
- 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.
- It can make moving home or downsizing difficult, although not impossible (more in the next section).
- 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.
- The money you receive may reduce your entitlement to state benefits.
- You cannot take out another loan against your home afterwards.
- You’ll need to pay lots of fees for advice and solicitors.
Can you move after releasing equity?
Members of the Equity Release Council must allow you to move home to a suitable property. By suitable they mean a property of equal or greater value that is just as easy to sell on the property market as your current residence. If you plan to move into an unconventional property, such as a remote barn conversion or a boathouse, you may be denied as these are harder to sell.
If you want to downsize to a less valuable property, you will have to pay off some of your equity release plan first.
Does equity release affect state benefits?
Using an equity release plan can affect your entitlement to means-tested state benefits, or the degree of your entitlement. Releasing equity cannot affect your entitlement to a private or state pension. But it might reduce your entitlement to the guarantee credit part of a state pension.
We have a dedicated guide on this subject. Search for it now on MoneyNerd!
Is equity release 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 are financially well off and do not need additional cash, then releasing equity will not be the most financially advantageous decision in regards to the inheritance you leave behind. By not releasing equity, your beneficiaries will inherit 100% of your home. By passing a property on to a child or grandchild, you’ll also be able to increase the inheritance tax threshold by £150,000.
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.
Learn even more about equity release schemes
Our pros and cons guide is a great way to start your equity release education. For much more on these schemes and what they mean for inheritance tax, benefits, interest rates and the value of your estate, stay tuned in to MoneyNerd. We have over 100 brand-new equity release guides for you to digest, and they’re all 100% free!