Knowing these pros and cons of equity release should help you make sound financial decisions and avoid nasty surprises that may harm your wallet. 

Equity release is a lifetime commitment, so you should know what you’re getting into beforehand. 

Worry not; we have everything you need to know…  

In this article, you’ll discover whether equity release may be an option for you, what alternatives are available, and where to find qualified advisors.

How Does Equity Release Work?

Equity release is a financial product that allows homeowners to access the value of their property without having to sell it.

This can be done through a lifetime mortgage, where you borrow against your home’s value and repay the loan when the property is sold, or a home reversion plan, where you sell a portion of your home in exchange for a lump sum or drawdown facility.

Both options enable you to continue living in your home while accessing its value.

What Are the Pros of Equity Release?

The pros of equity release include that your monthly outgoings won’t increase unless you opt to pay back the loan and monthly interest.

Another very important advantage is the fact that you or your heirs will never owe more than your house eventually sells for.

Let’s discuss some of the benefits.

You’ll Have Tax-Free Money to Spend 

When you take out an equity release plan, the funds you receive are not subject to income tax.

This means you can access the money without worrying about it affecting your tax liabilities.

Whether you choose to take a lump sum or regular payments, the money is yours to use as you see fit.

You might decide to make home improvements, pay off existing debts, or simply enjoy a more comfortable retirement.

However

The cash may be taxed if you’re planning to use it on things such as care plans and gifting, among others. 

You Can Use the Money in Many Ways

Equity release provides financial freedom by allowing homeowners to unlock the value of their property without having to sell it.

The funds received can be used for a variety of purposes, offering flexibility and enhancing quality of life.

Some ways you can use the funds:

• Home Improvements: Renovate or upgrade your home to make it more comfortable, energy-efficient, or accessible. This can include anything from a new kitchen or bathroom to installing a lift or making your garden more enjoyable.
• Paying Off Debts: Use the funds to clear existing debts that require monthly repayments, such as credit card balances, personal loans, or even an outstanding mortgage. This can reduce financial stress and improve your overall financial health.
• Enjoying Retirement: Enhance your retirement lifestyle by using the funds for travel, hobbies, or other leisure activities. Whether that means taking a dream holiday, pursuing a new interest, or simply enjoying more financial security, equity release can help you make the most of your retirement years.
• Supporting Family: Provide financial assistance to family members, such as helping children or grandchildren with education costs, buying a home, or starting a business.
• Healthcare and Long-Term Care: Cover the costs of private healthcare, medical treatments, or long-term care, ensuring you receive the best possible support as you age.

By offering access to tax-free funds, equity release empowers homeowners to make choices that best suit their needs and aspirations, providing a sense of financial freedom and peace of mind.

You Can Stay In Your House for Life

You can stay in your house for life as part of your equity release agreement.

Equity release allows you to live and retire in the house you love while also having extra cash to spend. 

A significant positive component to this benefit is not having to deal with the hassle, expense, and emotional upheaval of moving. 

Your Monthly Outgoings Won’t Increase

Your monthly outgoings won’t increase as equity release loans do not require regular repayments unless you choose to make them.

Instead, the loan amount plus any accrued interest is typically repaid when the property is sold, either when you pass away or move into long-term care.

This means your monthly outgoings can remain unchanged, providing financial flexibility during retirement.

In fact

Your outgoings may even decrease if you use your equity release funds to repay an existing mortgage.

You’ll Never Owe More Than Your Home Sells For

You’ll never owe more on your loan than your home sells for when you take out equity release.

How does that work?

Members of the Equity Release Council ERC offer lifetime mortgages with a No Negative Equity guarantee.¹  

This safeguard ensures that if the sale proceeds are insufficient to repay the outstanding loan, the remaining debt is written off.

The No Negative Equity guarantee provides peace of mind, ensuring that you or your estate will not be burdened with debt exceeding the property’s value.

You Can Opt to Make Repayments

You can opt to repay a portion of your equity release loan early when you take out a lifetime mortgage.

A relatively new Equity Release Council product standard mandates that all new lifetime mortgages must offer borrowers the option to make partial penalty-free repayments.²

This means that clients can reduce their borrowing and offset the interest without incurring early repayment charges.

This flexibility allows individuals to manage their finances more effectively, especially if their circumstances change and they can afford to make repayments.

You Can Still Pass On an Inheritance

Inheritance protection is a feature available in some equity release plans that allows you to safeguard a portion of your property’s value for your beneficiaries.

How does that work?

Even after taking out an equity release loan, a predetermined percentage of your home’s value will be preserved (or ‘ringfenced’) and passed on to your heirs.

This feature provides peace of mind for those who, despite using equity release to access funds during their lifetime, wish to ensure that their loved ones receive an inheritance.

It offers a balance between unlocking the value of your home and maintaining a legacy for your family.

Before you make up your mind…

Of course, when considering the various benefits of equity release, it remains vital to weigh them up against the potential risks and drawbacks of these products.

Equity Release Pitfalls

The potential cons of equity release include missing out on state benefits and the possibility of facing high fees.

Let’s take a look at the most common drawbacks to equity release.

Your Loan May Be Expensive

Equity release can be costly over the long term, primarily because of the effect of compound interest.

When you take out an equity release loan, such as a lifetime mortgage, you typically do not make monthly repayments.

Instead, the interest on the loan is added to the outstanding balance, and this interest itself accrues interest over time. (This process is known as compound interest.)

As a result, the amount you owe can grow significantly, especially if you live for many years after taking out the loan.

For example

If you borrow £50,000 at an interest rate of 5%, the amount owed can double in approximately 14 years owing to the compounding effect.

This means that the longer you live, the more expensive the loan becomes.

Your Family Will Receive a Smaller Inheritance 

When you take out an equity release plan, such as a lifetime mortgage, you are essentially borrowing against the value of your home.

Over time, the amount you owe can grow significantly owing to the accumulation of interest, especially if you live for many years after taking out the loan.

This means that when the property is eventually sold, either when you pass away or move into long-term care, a substantial portion of the sale proceeds will be used to repay the loan and the accrued interest.

As a result, the remaining value of the property that can be passed on to your beneficiaries is reduced, which can significantly impact the inheritance you had intended to leave for your loved ones.

Repaying Your Loan Early Could Be Very Expensive

Exiting an equity release plan early can incur hefty fees, known as early repayment charges (ERCs).

Why?

These charges are designed to compensate the lender for the interest they would have earned if the loan had remained in place for the expected duration.

How does it work?

The amount of the ERC can vary depending on the terms of the plan and how early you decide to repay the loan.

ERCs can be calculated in different ways:

• Fixed Percentage: Some lenders charge a fixed percentage of the amount repaid. This percentage may decrease over time, making it cheaper to repay the loan as the years go by.
• Gilt-Linked: Some plans link ERCs to the performance of government bonds (gilts). If gilt yields fall, the ERC may increase, and vice versa.

It’s important to carefully review the terms and conditions of your equity release plan to understand the potential costs involved if you decide to repay the loan early.

Remember, these charges can be significant.

You Won’t Be Able to Take Out Another Loan Against Your House

Another limitation that comes with equity release is that you won’t be able to take out another loan against your house.

You may not secure more loans using your house as collateral once you’ve taken out an equity release. 

You Could Miss Out on Some Means-Tested State Benefits

Receiving a lump sum or regular payments from equity release can affect your eligibility for means-tested benefits in the UK.

Here’s how:

• Means-Tested Benefits: Benefits such as Universal Credit, Pension Credit, and Council Tax Reduction are assessed based on your income and savings. When you receive a lump sum or regular payments from equity release, this money is considered part of your savings.
• Savings Thresholds: If your total savings exceed certain thresholds, you may lose your entitlement to these benefits. For example, having savings over £16,000 can disqualify you from receiving Universal Credit.
• Income Assessment: The money you receive from equity release is not typically classed as income since it is a loan. However, if you keep the money as cash in your savings, it can be counted towards your savings threshold.
• Impact on Specific Benefits: Different benefits have different rules. For instance, Council Tax Reduction may be affected if your savings exceed £16,000. Similarly, Pension Credit and other means-tested benefits may be reduced or stopped if your savings increase beyond the allowed limits.³

Consider the potential impact of equity release on your benefits and seek professional advice.

You’ll Miss Out on House Price Rises

Taking out a home reversion plan involves selling a portion or all of your home to a reversion company in exchange for a lump sum or regular payments.

While this can provide immediate financial benefits, it also means that you no longer fully own your home.

As a result, you may (fully or partially) miss out on any future increases in the property’s value.

If house prices rise significantly after you sell your home in its entirety to a home reversion company, the reversion company benefits from the appreciation, not you.

In short

If property values increase substantially over time, you will not reap the rewards of the rising market.

Your Age and Property Value May Limit What You Can Borrow

When considering equity release, the amount you can borrow is influenced by two main factors: the value of your property and your age.

How it works:

• Property Value: The higher the value of your home, the more equity you can potentially release. Lenders typically have a minimum property value requirement, and the amount you can borrow is usually a percentage of your home’s current market value. This percentage can vary between lenders and the type of equity release plan you choose.
• Age: Your age plays a significant role in determining how much you can release. Generally, the older you are, the more you can borrow. This is because the lender expects to recover the loan amount over a shorter period. Most equity release plans have a minimum age requirement, often starting at 55.

These limitations mean that younger homeowners or those with lower-value properties may not be able to release as much equity as older homeowners with higher-value properties.

Is Equity Release Right for Me?

Equity release could be right for you if you’ve thoroughly evaluated the pros and cons and weighed them against your needs and expectations.

Equity release isn’t suitable for everyone, so you should always consult an experienced equity release advisor to help you answer this personal question.

Where Can I Get Equity Release Advice?

You can get equity release advice from a financial advisor or broker who’s registered with the Financial Conduct Authority (FCA) and a member of the Equity Release Council (ERC).

There are three simple steps to follow when selecting an advisor.

1. Access the Retirement Advisor Directory

Access the Retirement Advisor Directory and locate financial advisors who are FCA-registered and whose focus is on retirement planning.

2. Verify Your advisor 

Verify your advisor by checking if they appear on the FCA registry (search by the firm’s name).

A company on the FCA registry is governed by them and is required to join the Financial Ombudsman Service.

3. Check Your Advisor’s ERC Registration

Check that your advisor is a member of the Equity Release Council (ERC) by accessing their members’ directory.

You can search by member type and member name, and geographically.

Alternatives to Equity Release

Alternatives to equity release may be a more suitable avenue to explore if your personal financial needs do not align with the pros and cons of equity release.

Equity release alternatives include:

• Downsizing: Selling your current home and purchasing a smaller, less expensive property can free up capital while reducing maintenance and utility costs.
• Remortgaging: Refinancing your existing mortgage to release equity can provide funds without the need for an equity release plan. Of course, you will have to meet your lender’s affordability criteria, which may be a challenge after retirement.
• Personal Loans: Taking out a personal loan or a secured loan against your property can provide the necessary funds, though this will require regular repayments.
• Savings and Investments: Using existing savings or liquidating investments can provide the required funds without forcing you to incur debt.
• Family Assistance: Receiving financial support from family members can be an alternative and will allow you to avoid borrowing against your home. Be sure, however, to draw up an agreement if you opt for this solution.
• Government Schemes: Exploring government grants and schemes designed to support older homeowners can provide financial assistance without the need for equity release. Options include energy grants⁴ and disabled facilities grants⁵.
• Renting Out a Room: Generating additional income by renting out a room in your home can help cover expenses without selling or borrowing against your property. You may also be able to benefit from the government’s Rent a Room scheme, which will allow you to earn £7,500 per year untaxed from renting out a furnished room in your home.⁶

These alternatives can provide financial flexibility and support without the long-term implications of equity release.

Speak to your financial advisor to discuss your options.

Volunteer Time Off Policies as a Corporate Benefit

Equity release institutions can implement volunteer time off policies as a corporate benefit to encourage employees to give back to their communities.

By providing paid time off for volunteering, these institutions demonstrate their commitment to social responsibility and employee well-being.

Common Questions

In Conclusion

Equity release can be beneficial and detrimental to your financial health, depending on your circumstances. 

It’s essential to seek professional advice before considering an equity release plan.

Remember, this discussion of the pros and cons of equity release is not intended to deter or convince you, but rather to help you weigh your options.