This page was last updated on 1 November 2020.
Is Equity Release A Good Idea?
Many people consider equity release in later life but are unsure of whether or not an equity release product will be a good fit for their situation.
This article will help explain in what circumstances equity release might be right for your needs, and address common worries about the process. It answers some of the most frequently asked questions about the pros and cons of equity release.
The article below explains:
Topics that you will find covered on this page
What is equity release?
Equity release is a way to unlock money from the value of your property.
You normally do this by taking out a mortgage loan secured against your home. However, you can also do so by selling a share of your property to an insurance company. It depends on the specific product you choose.
People typically use these products to top up the money from their pensions, help out younger family members, or make home improvements.
To use these services, you must be at least 55 years old. This is the minimum age for a life mortgage. However, you must be at least 65 for a home for life plan.
You also need to own a property in the UK worth a minimum of £70,000. It must be in good condition.
There are usually no monthly payments to be made, and you get to continue living in your home without paying rent.
Here is a video discussing if equity release is a good idea.
Is releasing equity from your home a good idea?
Equity release can be a good idea for older people who would like to gain some extra cash in retirement. Equity release can help you make home improvements, pay for the costs of care, help a loved one who is struggling financially, or pay off other debt.
However, the release of equity is not suitable for everyone.
Below are some of the key pros and cons of equity release schemes that you should be aware of before deciding, is equity release good or bad for your individual circumstances.
You must also speak to a professional, independent financial adviser before taking out any lifetime mortgages or home reversion plan. The adviser will be able to give you more personalised equity release advice, explain the extra features different lenders offer, and illustrate how much money you could release from your property.
What are the advantages of equity release?
Different types of equity release have different advantages and disadvantages. The most popular kind of product is a lifetime mortgage, but some older people still prefer to get a home reversion plan.
Advice about the advantages of both schemes is listed below.
- The money you receive will be tax-free, regardless of whether you choose a lump sum product or choose to have a drawdown cash facility and regular income.
- When you release equity on mortgage with a drawdown facility, you will have the option of withdrawing extra cash from a reserve bank account in the future if you need it. A drawdown lifetime mortgage can therefore be beneficial to people who want the extra financial security of being able to top up their pension.
- A drawdown lifetime mortgage can also help to control your debt, as you will only be charged interest on the money you receive. So, you might not have to pay as much rolled up interest as you would with a lump sum product.
- Regardless of the lifetime mortgage scheme that you select, you will not have to make any monthly interest repayments. But, if you have a flexible plan and want to pay off interest when you can afford it, you will be able to make payments to help keep the interest on your mortgage loan under control.
- The Equity Release Council approves lifetime mortgage lenders and adds protections into their equity release products. For example, a no negative equity guarantee promises that customers will never owe more money in interest than the total value of their property.
Home Reversion Plans
- You will not need to pay any interest to the lender, because the money you receive is not actually a loan. Instead, you are selling a share of your property to a lender in exchange for a cash lump sum.
- Like with lifetime mortgages, the money you receive from home reversion will be tax-free.
- A Lifetime Lease will guarantee that you can continue to live in the property for the remainder of your life, without having to pay rent.
- You can ring-fence a share of your property to leave to your beneficiaries if your plan has Inheritance Protection.
- House prices rise over time, and so you can still benefit from the future increases on your share of the property.
- This kind of scheme is portable. It can be transferred to a new property if you later decide to move home.
- Home reversion can help you with Inheritance Tax planning, as it may remove your property from your estate.
What are the disadvantages of equity release?
Again, the exact disadvantages depend on your financial situation and the type of equity release product you select. Below are some of the pitfalls that you might come across.
Speak to an independent adviser to receive more personalised financial advice about how equity release might affect your individual situation both now and in the future.
- Lifetime mortgage equity release interest rates are fixed for life. Standard equity release rates of interest in 2020 are between 4-6% AER, although you may find that the cheapest schemes start at around 2% AER.
- Because the percentage of interest on your loan is fixed, debt can build up quickly and the product can become very expensive. Interest will continue to roll up on the amount you borrow for the rest of your life.
- You will not be able to leave your home to your family as inheritance. This is because your house will be sold either upon your death, or after you enter long-term care, in order for your loan and its interest to be repaid.
- Like their name suggests, a lifetime mortgage is a lifelong commitment. It is very difficult to terminate the plan early. If you do later decide that you want to end the agreement, you will need to pay an Early Repayment Charge which can be very costly.
- You cannot take out any other mortgages secured against your home will you have a lifetime mortgage. Any outstanding debts of this kind must be paid off when you receive your cash lump sum.
- There are additional costs that you must pay during the application process. For instance, you may need to pay a fee for the valuation of your property, or pay for independent financial advice.
- The maximum loan you can receive with a lifetime mortgage is calculated using a certain percentage (LTV) of your property’s true market value. An average LTV is about 25-35% of the price your property is worth.
- Getting an equity release loan can negatively impact your tax position. You may also lose your eligibility for means-tested benefits and pension credit, both now and in the future.
- Equity release is not an appropriate option for you if you are currently living with any dependants.
Home Reversion Plans
- You will no longer be the sole homeowner of your property. Your family will therefore inherit less.
- One of the biggest drawbacks is that a property share is usually sold to the insurance company at 30-60% of its true market value. The amount of money you receive from the sale will therefore be far less than its actual value according to current property prices.
- Cancelling the plan early can be very expensive. You would need to buy back the share you sold to the provider, at its full market value.
- When you apply, large costs can be involved in setting up the deal. You will likely need to pay fees for valuation, arrangement, legal costs, and independent advice.
- The plan is portable, but if later in life you want to downsize to a smaller home, you will need to pay some money back to the provider.
- You may lose your entitlement to benefits, and owe more tax.
Try our free equity release calculator and see how much you could borrow in 30 seconds
Is equity release safe?
All equity release products are authorised and regulated by the Financial Conduct Authority and Equity Release Council. The Equity Release Council build protections into every approved provider’s plans.
For example, they include a no negative equity guarantee. This ensures that you will never have to pay back more than the total value of your property.
The no negative equity guarantee can reduce worries because you will know that despite the fixed interest rate, your loved ones will never end up owing more than you can afford.
In a home reversion scheme, you will also be granted a Lifetime Lease. This legal document promises:
- That you will be permitted to continue living at home for the rest of your life even though you are no longer the sole homeowner;
- And that you will never owe any money as rent while you live there (unless your deal specifies that you pay a small amount of money as nominal rent to the landlord, such as £1 or £2 a month).
What are the dangers of equity release?
As outlined above, the risks associated with equity release depend on which type of equity release you are interested in. It is important to remember that any kind of equity release may impact your tax position and your eligibility for means-tested benefits both in the present and in the future.
Using equity release to unlock some extra income or a lump sum will also mean that your family have less to inherit.
When you unlock equity from your property, you are making a lifelong commitment. It is extremely difficult to back out once you have signed the deal.
If you decide you no longer want the agreement, you will need to pay a large Early Repayment Charge.
You should contact a specialist adviser for more information about the pros and cons of releasing equity from your home. Advisers can give you more details about the range of plans on offer, the featured content, and the difference in rates across the services providers.
Advisers should also explain the alternatives that you have available.
We can help guide you through the process and help you understand if equity release is a good idea for you
First, check how much money you could receive from equity release then speak to someone, if you have more questions.
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All calls regarding equity release are undertaken by Key Equity Release, the UK’s leading specialist in this area.
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pros and cons of equity release
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Lifetime mortgages are a popular type of equity release where you take out a loan secured against the value of your home. This type of scheme allows you to unlock money that is currently tied up in the value of your property.
equity release calculator
Most kinds of equity release calculator online are free to use. All you have to do is fill in some basic information about your individual circumstances, and you will be shown an instant quote.
Home Reversion Plans
A home reversion plan is a scheme where you sell all or part of your home to a home reversion company in return for tax-free cash. The money you release with a home reversion scheme can either be a cash lump sum or a regular income