If property is your most significant or only asset, equity release can be an option for accessing tax-free cash.
It allows you to leverage the value of your home if you’re aged 55 or over and need a lump sum or regular income to cover a range of purposes.
More people are unlocking equity to financially plan for retirement, with lending figures showing UK homeowners accessed over £600 million through equity release in the third quarter of 2024 alone.
While equity release can be appealing, it’s a significant decision with various risks and long-term implications. You must carefully weigh the benefits and limitations and consider other viable options before deciding.
This guide looks into the pros and cons of equity release to help you determine if it’s suitable for you.
What are the Advantages of Equity Release?
Equity release offers various advantages. These include:
Tax-free Cash
Equity release is essentially a loan, meaning it’s not taxable. It’s exempt from taxes that apply when you receive money through regular income and other means like interest from savings. You can spend the money you release however you like without restrictions.
It can be a lifesaver if you don’t have adequate savings or a sufficient income to cover living expenses in later life. Common uses of released funds include:
Consolidating and paying off debts like personal loans, credit cards, or an outstanding mortgage
Making up pension shortfalls so you can have additional retirement or disposable income and have a better quality of life
Funding one-off expenses and lifestyle purchases like buying a new car
Meeting homecare costs like adapting and improving your home so you can live in it independently for longer
Paying for help around the home, such as domiciliary social care
Gifting a ‘living inheritance’ to your family or friends, including paying for a house deposit or university education for a child or grandchild
No Need to Move
With equity release, you don’t need to sell your home and move to access funds.
It allows you to retain your home ownership for life or until you need to move into long-term care. However, the property must remain your primary residence, and you must abide by the terms and conditions of your contract.
It can ensure you don’t uproot your life in your later years by leaving the home and community you already know and love. You also don’t have to deal with the stress and expenses of moving.
No Monthly Repayments
Unlike other borrowing options, you don’t need to make monthly repayments on the money you release or its interest if you don’t want to.
The loan and any outstanding interest are repaid by your estate when you or your partner in a joint policy either die or move to permanent care.
This ensures your monthly outgoings stay low without impacting your disposable income, and you don’t have to worry about the lender chasing you for payment. You can repay the loan or interest monthly to keep the debt down, but it’s not mandatory.
Related reading:
- Reasons for remortgaging.
- Remortgaging to release equity.
- Remortgaging to buy another property.
- Remortgaging with bad credit.
- Remortgaging for home improvements.
- I own my house outright can I remortgage?
- Capital raising mortgages.
Negative Equity Protection
Taking out an equity release product with a lender registered with the Equity Release Council (ERC) protects you from negative equity.
Under the guarantee, neither you nor your estate will be liable to pay any more when your property is sold, and the amount is insufficient to repay the outstanding loan, plus interest, to your provider.
It protects you from negative equity by ensuring you never owe more than the total sales price of your home, even if property prices fall.
Always look out for the ERC endorsement mark or logo to ensure you deal with an ERC member. You can also confirm membership credentials or search for a member operating in your area through the ERC website.
Access to Money When You Need It
Equity release products like lifetime mortgages have a drawdown feature that allows you to get the money you release in smaller amounts regularly or when you need cash. It offers more flexibility and can be more cost-effective than taking out the money in one lump sum.
Interest only applies when you withdraw the money, so you can get lower rates with a drawdown plan if rates fall. You’ll also pay less interest over time, so consider taking as little as you need first and waiting as long as possible before adding to the debt.
What Are the Disadvantages of Equity Release?
Equity release also features some drawbacks you need to consider. These include:
Interest Accumulation
If you choose not to reduce the interest monthly, it will accumulate and increase the size of your debt, especially if the equity release doesn’t end for an extended period. Due to the effect of compound interest, the amount you owe will increase monthly.
You should also note that the interest rate is usually higher than the top rate of standard residential mortgages. Making monthly repayments can help reduce the size of your debt and prevent the interest from compounding rapidly.
Reduced Inheritance
Equity release can involve converting some of your property’s value to cash or selling all or a percentage.
This will reduce the value of your estate, meaning you’ll leave less for your beneficiaries. Since repayments usually involve selling the house, your family won’t be able to inherit it.
They’ll only receive the balance left from the sale proceeds after the executor pays the equity release debt and the solicitor and agent fees.
You May Lose Some Benefits
Unlocking the equity in your home can increase your income and impact your current and future eligibility for means-tested benefits. Such benefits include Pension Credit, Universal Credit, or Council Tax Support.
Equity release can also affect the amount you’re entitled to, so discuss its impact on benefits with your adviser when applying. Even if you’re not getting benefits now, you may need them in the future.
Costs and Fees
Equity release also features various fees and costs in addition to the interest. Depending on the provider, they can include advice, valuation, application, and legal fees. The total fees can reach between £2,000 and £3,000, but providers can waive some of them.
You may also face early repayment charges if you exceed the monthly interest payment threshold the lender sets. The charges can vary between providers, so ensure you review the terms and conditions of the agreement before overpaying.
Reduced Equity
Your equity in the property immediately reduces when you take out an equity release product. The more funds you release, the further your equity decreases, which can impact your financial prospects in the future.
For example, taking out another loan using the property as security may be impossible. However, your provider can agree to further advances or extensions on the existing plan in the future.
You May Get Less Than the Market Value
If you choose to unlock equity with a home reversion, you’ll get much less than the market value of your share of the property.
Home reversions are a less popular way of equity release, and they involve selling all or part of your home to a provider at below-market value.
Lenders usually pay less because they’ll have to wait many years to get their money back. If you must release equity, choosing a different product, like a lifetime mortgage, is recommended.
Are Equity Release Products Regulated?
Yes. The FCA regulates all equity release products. This means that anyone advising and providing these plans must meet clear standards, and the FCA will act if they fail to meet them.
The regulations require all advertisements or literature on the products to be fair, transparent, and not misleading.
Customers must get disclosures or documents that help them understand any recommended products and services and compare them with others if they choose to.
Regulations also require advisers to have specific qualifications for the products they’re advising on.
They must also follow a process that ensures you have explored all other options and that any recommendation considers your full circumstances and needs.
Why Should You Choose A Provider with ERC Membership?
Providers who are ERC members take a pledge to deliver high standards in the advice and provision of equity release.
The standards protect you and ensure you get the best possible outcome, whether you’re dealing with a lender, financial adviser, or solicitor.
They ensure you get a clear and complete presentation and explanation of your equity release plan.
They must also inform you about the benefits and limitations of the plan, together with your obligations under the terms of the contract. The adviser or equity release provider must give you information about:
- All the costs involved in setting up the plan
- The implications of the plan on your benefits or tax position
- What will happen if you wish to move to another property
- How changes in house values may affect your plan
Final Thoughts
Equity release has various benefits if you’re looking to leverage the value of your home for tax-free cash in your retirement.
However, it also features multiple risks and drawbacks you must consider before entering an agreement. Ensure you get independent financial and legal advice to determine whether it suits your circumstances and long-term needs.
Sources and References:
- https://www.aviva.co.uk/retirement/equity-release/equity-release-calculator/
