Pros and Cons of Equity Release

Pros and Cons of Equity Release

This page was last updated on 1 October 2020

Pros and Cons of Equity Release

The aim of this article is to help explain the pros and cons of equity release schemes so that you can make an informed decision about whether want to release equity from your home.

It tells you the key facts about the different types of equity release and informs you of any dangers of equity release. It is very important that you still seek independent advice from a professional financial adviser before signing any agreements with an equity release provider.

Topics that you will find covered on this page

Equity release pros and cons

There are several key pros and cons to taking out an equity release product.

Is equity release good or bad?

Unlocking equity from your home can be a great way to get some extra cash in retirement. All equity release products are authorised and regulated by the Financial Conduct Authority.

However, equity release is not suitable for everyone because the product still does carry certain risks.

The pros and cons depend on what type of equity release you are considering: a life time mortgage or home reversion plans. Lifetime mortgages are the most popular way of unlocking cash from the value of your property.

Below, you can read more about the differences between the two products and their individual equity release disadvantages and advantages.

Here is a short video on the pros and cons of equity release.

Lifetime Mortgage

Most people who take out equity release products choose a lifetime mortgage. This popular kind of equity release is where you take out a loan secured against the value of your house in exchange for either a cash lump sum or a drawdown income.

People do not need to sell their home when they take out a lifetime mortgage. Instead, your property is sold after the last homeowner’s death or once they move into care long-term. The loan and interest is then repaid using the proceeds of your house’s sale.

The bullet points below guide you through the pros and the cons of a lifetime mortgage.

What are the advantages of equity release?

  • The money you receive from a lifetime mortgage loan is tax-free.  This is one of the major benefits of equity release with a lifetime mortgage.
  • If you select a lifetime mortgage with a drawdown facility, you will be able to release extra cash from a reserve bank account as and when you need it. A cash facility can therefore help you top up your retirement income on a regular basis.
  • If you do choose a drawdown lifetime mortgage, you will not be charged as much interest as you might with a lump sum product. This is because interest will only roll up on the money that you actually release from your house.
  • Whichever kind of lifetime mortgage product you choose, you will not be required to make any monthly interest repayments. However, if you select a flexible product you may choose to pay off interest monthly when you can, in order to keep the debt under control.
  • The Equity Release Council builds protections into every approved provider’s plans. For example, they include a no negative equity guarantee, meaning that you will never owe more than the value of your home.

What are the disadvantages of equity release?

  • Your loved ones will not be able to inherit your house. This inheritance is not possible because your house will be sold either upon your death or once you enter long term care in order to repay the loan and all its interest.
  • As the name suggests, lifetime mortgages are a lifelong commitment and are difficult to stop. If a homeowner does later decide that they would like to exit their scheme early, this mortgage holder will incur an Early Repayment Charge. The charges can be very costly.
  • Equity release is not a suitable option for people who are living with any dependants.
  • The maximum amount of money you can receive will be calculated  on a certain percentage (LTV) of your home’s total market value. Life mortgage rates vary from provider to provider and depend on your age, but an average LTV would fall between 25 and 35%.
  • The products have fixed interest rates. Interest rates in 2020 are usually between  4-6% AER, although the cheapest schemes start at 2%.
  • The fixed rate means that interest will continue to roll up on the amount you borrow for the rest of your life. Your debt to the lender can therefore increase quickly.
  • While you are in this agreement, you cannot take out any other loans secured against your home. If you have any outstanding debts when you apply, you must use the cash you unlock to pay off the debts.
  • Any equity release loan may impact your tax position and eligibility for means-tested benefits like pension credit.
  • Additional costs are involved in the application process. For example, it is a legal requirement that you seek professional independent advice before signing the deal for these products. You may also need to pay a fee for the valuation of your property.

"Unlocking equity from your home can be a great way to get some extra cash in retirement. All equity release products are authorised and regulated by the Financial Conduct Authority."

Home Reversion Plan

A less popular option is to sell a share of your property to an insurance company in exchange for a tax-free cash lump sum.

Below is more information about the pros and the cons of getting a home reversion plan.

Is releasing equity a good idea?

  • The money you get as income will be tax-free.
  • Home reversion company plans are regulated. A Lifetime Lease will guarantee that you can continue living in your property without being charged any rent.
  • There is no interest to pay to the providers, because the money you unlock is not a loan.
  • You can protect a share of the property to leave to your children.
  • Home for life plans can help with Inheritance Tax planning by removing your property from your estate.
  • As house prices increase over time, you can still benefit from the future rises on your share.
  • These schemes are portable and can be transferred to a new home if you move.

What are the pitfalls of equity release?

  • The amount of money you access will be far less than its regular value according to house prices. A share is usually sold to the lender at a rate of 30-60% of the property’s true market value.
  • You will no longer be the sole homeowner. Your children will, therefore, have less to inherit.
  • It is very expensive to cancel the plan early.  If you decide to do this, you would need to purchase back the share you sold from the providers at full market value.
  • Even though the plan is portable, you will end up paying money back to the provider if you decide to downsize to a smaller property.
  • Large set-up costs can be involved. For example, you might need to pay for the valuation, advice, arrangement, and legal fees.

 

Make sure to get in touch with a financial adviser if you have any other questions about equity release products or the amount of money you can access with the different schemes. You can also use an online equity release calculator to get a free instant quote.

This video summarises the benefits and pitfalls that you have learnt on this page.

Does equity release affect benefits?

Yes. If you release equity from your home, your tax position, and entitlement to state benefits such as pension credit will be impacted.

As a result, you may owe more tax in the future. Speak to a specialist adviser for more information and a personalised illustration of how equity release may affect your financial position.

What are the alternatives to equity release?

There are a couple of alternatives that you might want to consider. You can speak to a financial adviser to discuss which of these options might be best for your personal situation.

Downsizing

One alternative is to think about downsizing your residence. If you sell your current home and move to a new, smaller property, you will be able to benefit from the profits of the sale.

You can then use the proceeds however you wish. For example, to pay off debt, help out a younger family member, or make home improvements. Choosing this route may incur some expenses – the fees for moving house can be somewhat costly – but you would not affect your tax position or entitlement to state benefits.

Moving into a smaller home could also save you money in the long term, for example by helping to reduce the costs of energy bills.

With downsizing you will also be able to leave your new home to your family as inheritance after you move into care or die.

Retirement Interest Only Mortgages

An interest only mortgage in retirement grants you a one-off sum of money. You are then required to pay interest on this initial amount each month.

When you apply, you might be asked to provide your retirement income details. This is needed to prove that you can afford the monthly rate, and so the provider can be sure that interest will continue to be repaid without a problem.

Other articles that you may find useful

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 help you understand if it is right for you.

how does equity release work?

Equity release can be confusing at times.  This in depth articles explains how equity release works, who the main providers are and the different type of products available today. We also expllain the pros and cons of taking out a scheme.

pros and cons of equity release

There are several key pros and cons to taking out an equity release product. This article examines the range of advantages and disadvantages associated with equity release. A worthwhile read if you are considering your options.

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

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