Pros and Cons of Equity Release

If you are a home owner aged 55 or over, then you could unlock the cash that is tied up in your home with an equity release scheme.

Equity release gives you access to some of the equity held in your property, providing you with a cash sum that is completely tax free and there to use how you want. Perhaps you would like to make improvements around your home or garden, such as a new kitchen or conservatory, help your family out with a deposit for a new house, top up your retirement income or pay off outstanding debts – the choice is completely up to you.

Although it is fast becoming a major part of many people’s financial planning, there are pros and cons to equity release that you need to consider so you can be certain the decision you make is a wise one.

How do I calculate the equity in my home?

The equity in your home is the value of your property minus any outstanding loans you have against it. Although there are a number of different types of equity release schemes, they all tend to fall into one of two categories:

  • A lifetime mortgage
  • A home reversion plan

Both options give you access to a tax free cash lump sum but in very different ways and both options come with their owns set of pros and cons, so it’s important  that you are clear on how they work.

Lifetime Mortgage

With this type of equity release scheme, a loan is secured against your home that provides you with a tax free sum of money. There are no monthly repayments to make (unless you choose one of the plans that allows you to make regular repayments) and you still own you own home. Instead interest is added to the loan and repaid once you have died or moved into long term care and property is sold.

Advantages of a Lifetime Mortgage

  • You receive a tax free lump sum of money to spend how you wish
  • There are no monthly repayments unless you choose a lifetime mortgage plan that lets you repay some of the interest
  • You can live in your home for the rest of your life
  • You continue to have full ownership of your home
  • You benefit from any increase in the value of your property
  • You will never owe more than the value of the property
  • You have the flexibility to use the 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 have the flexibility to move in the future

Things to consider

  • Equity release interest rates tend to be higher
  • The money owed can increase quickly as you pay interest on the interest accrued
  • It will reduce the value of your estate, affecting any inheritance you wish to leave for family – some lifetime mortgages will allow you to ring fence a percentage of the value of the property but this will reduce the amount of money you can release
  • Early repayment charges may apply if you repay early
  • Your entitlement to state benefits may be affected

Home Reversion Plan

With this type of equity release scheme, instead of a loan secured against your home, you agree to sell part or all of the property. There are no repayments and you can continue to live in the property for life. Once you have died or moved into long term care, the property is sold and the home reversion loan provider will receive their proceeds of the sale based on the percentage of the property they own; with the remaining balance going to your estate.

Advantages of a Reversion Plan

  • You receive a tax free lump sum
  • You can guarantee an inheritance for your children by selling only a part of the property’s value
  • There is no interest to pay
  • You will benefit from any property value increases on the share of property you have retained 
  • You can live in your home rent free for the rest of your life
  • You can usually release higher amounts of cash than with a Lifetime Mortgage
  • The older you are the more money you can release
  • You can remove your home from your estate for inheritance tax purposes

Disadvantages of a Reversion Plan

  • Only available to people aged 65 and over
  • You will no longer fully own your home – the plan provider will own part or all of it depending on the percentage you have sold
  • You will still be responsible for the upkeep and maintenance of the whole property
  • The amount the home reversion company will pay for the property will be considerably lower than the market value
  • If you die soon after agreeing your plan, you’ll have lost a significant amount of money
  • It will reduce the value of your estate
  • You will not benefit from any increase in house prices on the part of the property you have sold
  • If you wish to buy back your property it could be costly as you will be required to pay the full market value
  • Your entitlement to state benefits may be affected

Where do I go for advice?

In the first instance if you would like to know how much money you could release, try our free, quick and easy to use calculator.

Then it would help you to speak to an expert as they will guide you through the process, consider alternative options if suitable and explain the different types of plans available.

They will then provide you with a written key facts illustration for you to consider and talk through with your family.

We have chosen to partner with Age Partnership as they are one of the leading providers, compare equity release schemes across the whole of the market and have secured special rates with lenders that you may not be able to get elsewhere.

Their initial advice is completely free and you only pay fees if you decide to go ahead with one of the equity release schemes they recommend.

pros and cons of equity release

We know it's a big decision!

That's why we have teamed up with Age Partnership one of the UK's leading equity release specialists.

Find out how much cash you could release by clicking on the button below.

Equity Release Calculator

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