Is releasing equity a good idea?
Equity release could be a good thing if you're over 55 and want extra money for home or garden improvements, to help family financially or as additional retirement income. An equity release mortgage lets you free up tax free cash without having to move home and there are no monthly repayments.
Use the equity release calculator to see if its right for you
However releasing equity is not suitable for everyone. Given that you are dealing with what is probably your biggest asset, your home; equity release is not a decision that should be taken likely. The following guide explains about the safety, the downsides and the pros and cons of equity release to help you decide if it’s a good idea for you.
Releasing equity – a good idea or a bad idea?
Equity release mortgages are becoming more popular as people look for ways to increase their income or provide a cash lump sum to make life more enjoyable.
The most popular scheme is known as a Lifetime Mortgage. The interest accumulated is added to the original equity you release and only repaid once your home is sold, so there are no monthly repayments. This could be good for those wanting to reduce monthly outgoings but a bad idea if you planned to leave property for family.
To be eligible for equity release you need to be at least 55 years old, own your own home and have sufficient equity in your property, which is the difference between the value of your property and any outstanding loan or mortgage you may have secured against it.
It’s worth noting that you don’t necessarily have to have a mortgage free property, as any existing mortgages or loans can be repaid with the money you release.
But what is the catch with equity release?
Releasing equity lets you access the money tied up in your home, making life that bit easier financially. The catch with equity release is the interest is compounded, so grows much quicker compared to a residential mortgage.
But if you prefer to use some of the money that’s available to you now, rather than leave it as an inheritance, equity release could be a good idea for you.
Latest news October 2021: Equity release interest rates are at their lowest ever starting from 2.53% AER and will be fixed for the rest of your life - so now could be a good time to consider your options
Is Equity Release Safe?
Equity release is safe as it’s regulated by the Financial Conduct Authority (FCA) and overseen by the Equity Release Council (ERC). Their rules and safeguards ensure you always own your home and have flexibility to move. In addition, all FCA and ERC governed lifetime mortgages come with a no negative equity guarantee.
Here’s how the Equity Release Council’s protect you:
- Interest rates must be fixed or if variable, there must be an upper limit or cap that is fixed for the lifetime of the loan
- You must be able to stay in the property for life or until you move into care, just so long as you abide by the terms and conditions of your lifetime loan
- You have the right to move to another property as long as your provider is happy that the new property offers continued security on your equity loan.
- The lifetime mortgage must come with the all important ‘No negative equity’ guarantee which means that when the property is sold and solicitors and agents fees have been taken into account, if the amount left is not enough to pay the outstanding loan, neither you or your estate will be liable to pay any more.
In addition to these product standards, for your security the Council also provides strict rules and guidance on the sales process. To ensure you understand exactly how does equity release work, they stipulate that you can only take out a loan if you receive professional financial advice and independent legal advice.
So to be certain that your equity release scheme is safe, you just need to ensure the company you choose is a member of the Equity Release Council.
How much equity can I get?
What are the pros and cons of equity release?
For some homeowners, unlocking money tied up in their home will be a good idea. For others, there may be a better, more suitable solution. Considering the pros and cons of equity release and reviewing both the advantages and disadvantages will help you decide if releasing equity is the best option for you.
For example, for many homeowners one of the main advantages of equity release is there are no monthly repayments. However, one of the main disadvantages of releasing equity is that interest rates are higher compared to residential mortgages and interest is compounded, so will grow much quicker.
Whether the positives outweigh the pitfalls will depend on your personal requirements. Which is why understanding all the pros and cons from the outset is key.
What are the advantages of equity release?
The money is tax free
The equity you release from your home is tax free and you can spend it how you like
No monthly repayments
There are no monthly repayments unless you choose a lifetime mortgage plan that lets you repay some of the interest
You own your home
You continue to have full ownership of your home and can live there for the rest of your life or until you move into long term care
You benefit from increasing house prices
Although your loan will continue to grow as the interest is added, so hopefully with the value of your property
You will never owe more than the value of your property
As members of the Equity Release Council, equity release providers guarantee that you or your family will never owe more than the value of your home
Flexibility to release equity when you choose
You can release money as and when you like with a ‘drawdown’ facility (with this type of plan you only pay interest on the money you have taken, not the amount held in reserve)
You can still move home
You have the flexibility to move in the future as long as your equity release providers approves the property
Equity release interest rates are more competitive
Equity release interest rates reduced throughout 2020, which is a pattern that has continued throughout 2021.
What are the disadvantages of equity release?
Interest rates tend to be higher
Although as mentioned, equity release rates have now dropped to as low as 2.30%, making it a more competitive option
Interest is compounded
The money owed can increase quickly as you pay interest on the interest accrued. Choosing a drawdown facility can help as you only pay interest on the money you have released. Also, you could choose a lifetime mortgage that lets you repay some of the interest, therefore reducing the size of the loan
It will impact any inheritance you leave
As the loan is repaid from the sale of your property, it will affect any inheritance you wish to leave for family. Some lifetime mortgages allow you to ring fence a percentage of the value of the property but this will reduce the amount of money you can release
There may be penalty fees for repaying the loan
Some lifetime mortgages charge early repayment fees if you wish to repay the loan
State benefits may be affected
The tax-free cash you receive may impact your entitlement to state benefits
Avoiding the pitfalls of equity release
Any pitfalls or disadvantages to releasing equity from your home should be highlighted when reviewing your options with an equity release specialist. As members of the Equity Release Council, providers have a responsibility to ensure customers have been advised of the risks, features and benefits of equity release and that they have considered all the alternatives.
Use the calculator to see if its right for you
Tips for choosing the right equity release scheme
- Consider all the alternatives first
- Only borrow the money you need or choose a drawdown scheme
- Consider interest repayments or inheritance protection options
- Compare the whole of the market
- Get independent advice from a qualified equity release adviser
- Check options for early repayment
Releasing equity from your home is a big decision, so it’s worth considering the pros and cons before deciding if equity release is a good idea for you.
In addition to our guides, our equity release calculator is quick and easy to use and will show you how much cash you could release.
Try the calculator
Speaking to a specialist adviser will then help answer any questions you may have so you can fully understand the process and how it works.
An adviser who can compare equity release schemes across the whole of the market could potentially save you money as they will not be tied to a particular lender or group of lenders.
Releasing equity is safe and you will always own your home – you just need to weigh up the pros and cons to decide is equity release is right for you.
Important Facts about Equity Release
Will I still own my property?
Yes, with a Lifetime Mortgage you continue to own the property until you die or move into permanent care and the property is sold. (There is another form of equity release known as a Home Reversion Scheme which involves selling all or part of your home to a company however this option is not as popular in the UK).
Are they for people with large properties?
No; you just need to have sufficient equity and property worth at least £150,000.
What is the smallest amount I can borrow?
You can borrow from £10,000 with some lenders but different providers do have their own limits.
Will my children inherit my debt?
Your children won’t inherit the debt however once you have died, they will need to repay the loan from the proceeds of the sale of the property. Once the loan has been repaid, any remaining equity would then be paid to your children.
What’s more, for your added security all lifetime mortgages with companies that are members of the Equity Release Council now come with a “no negative equity guarantee”, which means that you will never owe more than the value of your home.
Are Equity Release Interest Rates much higher than others?
Lenders will charge more than the standard mortgage rates as they are having to wait a long time to get their money back and are also taking a risk that your property will always be worth more than the mortgage.
Currently interest rates for Lifetime Mortgages are around 3% compared to normal residential rates of around 2% to 4%.
Can I repay the loan if my circumstances change?
Yes you can repay an equity loan at anytime however you may incur additional admin fees or early repayment charges. There are schemes that let you repay some of the interest on a regular basis which may be worthwhile if paying off your loan is a consideration.
You can also move house if you wish, subject to the size of your outstanding loan and the value of the new property.
Your adviser will help you explore all the options before deciding if equity release is a good or bad idea for you.
Will this affect my State Benefits?
Potentially yes, your benefits could be affected depending on your own individual circumstances. Your adviser can help you with this and you can also go to the Benefits Agency or Citizens Advice for more information.
How can I avoid any pitfalls of equity release?
To ensure you avoid any pitfalls, it's important to get advice from a qualified financial adviser (visit www.unbiased.co.uk for your nearest adviser). All Lifetime Mortgage companies in the UK are regulated by the Financial Conduct Authority and as members of the Equity Release Council, you are also protected by their strict rules and guidance.
Your solicitor can also act as a good independent point of advice.
Does equity release affect your credit score?
Equity release will not affect your credit score and because the amount of tax free cash you can release depends on your age and the value of your property, your current credit score will not affect you eligibility to apply either.
Equity release can however affect certain benefits you may receive such as pension or universal credit, so it is important to get the advice of a qualified expert before you make any decisions.
Equity Release could be right for you
It could make life that bit easier