What are the pros and cons of equity release?
Equity release is a type of mortgage that lets you access the equity tied up in your home without having to make monthly repayments. Whilst a mortgage with no monthly repayments may sound like the perfect option, there are pros and cons to releasing equity this way that should be considered.
In this article I explore the advantages and disadvantages of a lifetime mortgage which is the most popular type of equity release.
The advantages of equity release
Like any financial product, equity release has its pros and cons, so understanding more about them will help you decide if releasing equity is a good idea for you.
You’ll have access to tax free cash
The money you receive is completely tax free and yours to use as you choose. The amount of equity you can release will depend on your age and the value of your property.
The money can be used how you wish
The cash you release can be used however you want. To pay off an existing mortgage or debt, make home or garden improvements, help family financially, pay for a trip of a lifetime or increase your retirement income – it’s entirely up to you.
The only stipulation is that if you have an existing mortgage, it must be repaid with the money you release.
There are no monthly repayments
As the loan and interest are repaid once you die or move into long-term care, you’re not required to make any repayments. However, if you can afford it, you might want to consider making repayments against some or all of the interest as it will reduce the overall cost of your loan.
I should also point out that it is now a requirement of the Equity Release Council that all members plans allow customers to repay a percentage of the loan each year.
You continue to own your home
With equity release you continue to own 100% of your property which means you continue to benefit from any price rises in the housing market. You can also remain living there either for life or until you move into long-term care. At this point the property will be sold so the debt can be repaid.
If your plan is in joint names, your home will only be sold once both of you have died or moved into permanent care.
You have freedom to move
Another Equity Release Council rule ensures that all customers have the right to move home. Your lender will need to be happy with the property you wish to buy.
You can release equity even if you have an existing mortgage
You can still benefit from equity release if you have a mortgage however you will need to repay the outstanding debt with the money you release.
You can release the money in one go or as required
You can choose to either release your equity in one go with a single payment, or as and when you need it with a drawdown lifetime mortgage. The benefit of this type of equity release is that you only pay interest on the money you have drawn down, not the cash that is held in reserve.
There are a range of products with flexible options
Products, interest rates and financial incentives differ from lender to lender so it's important to compare equity release deals and understand what options are available to you.
Depending on your requirements you can choose plans that include downsizing protection, inheritance protection or the opportunity to repay the loan early without incurring penalty charges.
You’ll never owe more than the value of your home
One of the Equity Release Council’s most important rules is the ‘no negative equity guarantee’ that ensures you or your family will never owe more than the value of your home.
To ensure you are protected by all of the Equity Release Council’s rules and safeguards, make sure your chosen lender is an ERC member.
It could reduce inheritance tax liabilities
As you are reducing the value of your estate, equity release could reduce any inheritance tax liabilities. However, as inheritance tax rules are complex, it is important to seek professional advice if you are considering a lifetime mortgage for these purposes.
You could benefit from ill health
Typically the younger you are, the lower the percentage of equity you will be able to release. However, lifetime mortgages are one of the few financial products where poor health could work to your advantage. If the lender believes the loan will be repaid sooner, you may be offered better terms.
It’s a Financial Conduct Authority regulated product
Equity release is regulated by the Financial Conduct Authority (FCA) with standards set and overseen by the Equity Release Council (ERC). Choosing an FCA authorised company that is a member of the ERC will ensure you are protected by their rules and safeguards.
Disadvantages of equity release
Now let’s take a look at disadvantages and drawbacks to equity release:
It could impact any inheritance you planned to leave
As the loan is repaid from the sale of your property, it will reduce the value of your estate, therefore impacting any inheritance you leave for loved ones.
If leaving a legacy is important to you, some plans offer inheritance protection which allows you to protect a percentage of your property value. Or you could consider making regular repayments against the interest will help to keep the overall cost of the loan down.
The interest is compounded
With this type of mortgage you pay interest on the loan and on the interest already accumulated. As a result, the overall debt will grow at a faster rate compared to standard residential mortgages.
Making repayments against the interest will help reduce the impact of this pitfall, as it will help keep costs down. Also choosing the drawdown facility means you only pay interest on the money you have taken.
Interest rates are higher
As the lender’s risk is greater with a lifetime mortgage, the interest rates are higher compared to standard residential mortgages.
However, with an average of just 1%, as stated in the Equity Release Council's Report, the difference between the two is far lower than it used to be as the hike in equity release interest rates hasn’t been as significant as with residential mortgages.
Comparing the market or using one of the specialist companies to compare plans for you will help you understand what is available and how to secure the best deal.
It may affect your benefits
The money you release will form part of your savings, which could in turn affect any means tested benefits you receive such as pension credit, universal credit or any council tax reduction you are currently entitled to.
A qualified equity release adviser will be able to confirm if this pitfall will impact you, highlight any other negative aspects you should be aware of and review alternative options for raising extra cash.
It can be expensive
When you release equity from your home you can expect to pay between £2,000 to £3,000 in fees but this amount will vary depending on your situation.
Comprised of professional fees for advising on and arranging the mortgage, solicitors and surveyor’s fees and ongoing costs, equity release can be expensive. However, the charges can be paid once the mortgage is in place and there are ways to keep costs down.
You may face early repayment charges
If your situation changes and you want to repay your loan, another pitfall is that you could incur early repayment charges. The amount will depend on your plan’s terms and conditions and how long the loan has been in place.
Some lifetime mortgages let you repay the loan charge free after a certain number of years, so if you think this may be a possibility, speak to your advisor about it when comparing plans.
Next steps
Equity release is a big decision, so it's important to be certain it's right for you.
We work in association with leading equity release specialists Age Partnership who will be happy to answer your questions and provide you with more information. Their initial advice is completely free of charge and there is absolutely no obligation to proceed.
You can request a call back here or call 0800 133 7656 for an immediate discussion. Alternatively, use the calculator to find out how much cash you could release from your property.
If you want to know more about the pros and cons of home reversion plans, an alternative solution that entails selling a percentage of your property, read our home reversion guide.