What are the pros and cons of equity release?

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 can be used however you choose. Perhaps 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.

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, the are no monthly repayments.

However, if you can afford it, you can choose to make repayments against some or all of the interest, which in turn will reduce the overall cost of the loan.

In addition, it is now one of the Equity Release Council’s mandatory requirements that all lifetime mortgages allow customers to repay a percentage of the loan each year.

You continue to own your home

Throughout the life of the mortgage you will continue to own 100% of your property. This means that you will also benefit from any price rises in the housing market.

You can stay in your home for life

In addition to owning your home, you can also remain living there either for life or until you move into long-term care. At this point the property would be sold and the debt repaid.

If the plan is in joint names, the property is only sold once both parties 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.

The application process is straightforward

As there are no monthly repayments to make, you do not have to demonstrate affordability as you would with a standard residential mortgage. You will have to get legal advice from a solicitor though which is a requirement when applying for all lifetime mortgages.

Typically the application process takes around 8 weeks.

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

Plans vary so it’s important to compare equity release deals and understand what options are available to you. For example, interest rates and financial incentives will differ from lender to lender.

In addition, 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

Possibly 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

It could impact any inheritance you planned to leave

The money you release is paid back from the sale of your property when you die or move into permanent care, so the downside is it will reduce the value of your estate.

Once the loan is repaid, any remaining funds will be paid to your beneficiaries. The amount will depend on how long the lifetime mortgage has been in place.

If you would like to guarantee an inheritance, there are plans that allow you to protect a percentage of your property’s value. Also 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.

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