Equity release can help you to unlock some of the wealth tied up in your property without you having to sell your home.
It’s become a popular option for many homeowners aged 55 and over, who last year released £2.3 billion in property wealth through equity release.
Here, we run through some of the benefits of equity release, as well as the downsides you need to get to grips with before deciding whether it’s the right option for you.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
Benefits of equity release
The specific benefits of equity release will depend on the plan you choose and your personal circumstances. There are two main types of equity release, lifetime mortgages, which are the most popular, and home reversion plans. However, the general benefits of equity release include:
Money released is tax-free
Property prices have risen steadily in many areas of the UK over recent years, which means homeowners often have a significant amount of wealth tied up in their properties. One of the biggest benefits of equity release is that you can release a portion of this equity, tax-free, without having to sell your home.
Depending on the type of plan you choose and your personal circumstances, you might be able to release anything from 30% up to 60% of your home’s value. You can either take this money as a lump sum, a regular income or a combination of these, and you can do as you wish with it. For example, you might decide to use it to pay off remaining debts or increase your income in retirement.
Some equity release plans offer a drawdown function that enables you to release money from your property, but rather than taking the full sum straight away, you can take a portion of it now and then leave the rest in a cash reserve to draw down later as and when you need it, helping to keep interest charges down.
You don’t have to make any monthly repayments
You won’t usually need to repay the money you’ve released, or any interest, until you die or you move into long term care and the property is sold. However, plans have become more flexible in recent years, so that if you want to pay back some of the funds you’ve borrowed early, you can generally do so.
Bear in mind that equity release will obviously have an impact on any inheritance you might have planned to leave your loved ones when you die, but it might also mean that your estate won’t need to pay as much, or indeed any, inheritance tax. Find out more in our guide Six ways to reduce inheritance tax bills.
You can carry on living in your own home
Many of us want to stay in our homes for as long as possible, and by releasing equity from your home you can carry on living in your own home until you die or move into long-term care.
Often the money people release from their homes helps to boost their income, but it might also be used to fund the cost of care or any alterations that may be needed to your home if your care needs change over time.
You’ll never owe more than your property is worth
Provided you take out a product from an equity release provider that’s a member of the Equity Release Council (the trade body for the equity release sector), your equity release plan will come with a ‘no negative equity’ guarantee. This means that neither you nor your family will have to pay back more than your house is worth when you move into long term care or die, even if property prices plummet.
You might still be able to move in the future
Even if you’re not planning to move now, your plans may change in the future, but it may be possible to take out an equity release that enables you to move, or downsize in future without penalty.
Some lifetime mortgages allow you to move home and ‘port’ your equity release plan to another property. You might also be able to get ‘downsizing protection’ from your equity release provider, so you can repay the plan in full without paying an early repayment charge. However, this depends on your equity release provider’s rules, so you’ll need to find out if this is possible before you sign up to a particular scheme.
Downsides of equity release
There are a number of benefits to equity release as we’ve outlined above, but it’s still a significant financial commitment, and there are several potential downsides to consider.
Equity release is expensive
Equity release rates are usually higher than standard mortgage rates, so if you are looking to access cash from your home, then remortgaging or downsizing could potentially be a cheaper option (although you’ll need to be able to afford the monthly repayments).
If you take out a lifetime mortgage, the amount you owe can build up into considerable sums over time thanks to interest compounding, and the longer you live, the more money you will owe. Interest rolled up at just 3% will double the amount you owe after 24 years, for example. You may be able to repay equity release early, but depending on the type of plan and your provider, you might face a hefty early repayment charge (ERC).
If you’ve opted for home reversion, where you sell all or part of your home to the equity release provider, you might also need to consider other charges you might be liable for, such as ground rent.
It’s also important to note that if, after taking out an equity release plan, you decide that it’s not for you, it can be very difficult, expensive, and in some cases impossible to unravel the plan, so it’s not a decision to take lightly.
The amount your loved ones stand to inherit may significantly reduce
For many people, their property makes up a considerable proportion of their estate when they die, and taking out an equity release plan is likely to eat into its value significantly, as the money borrowed will be repaid when you die (or move into care). This makes it really important to inform your family if you’re considering taking out an equity release plan, and the implications this may have on them.
If you’ve taken out a home reversion equity release plan, your provider will own a portion or all of your property, so you may not be able to leave it to any beneficiaries.
Your government benefits might be affected
Releasing equity from your home will provide you with a lump sum which might affect any means-tested benefits you currently receive or could be entitled to in the future. You can read more about this in our guide to How lump sum payments can affect your benefits.
The amount you can release is limited
If you release equity from your home, you can usually only unlock between 20% and 60% of your property’s market value, so it may be more financially beneficial for you to downsize or remortgage to release cash from your home. If you’re determined to remain living in your home, you could consider renting out a room to receive some additional income. Find out more in our article Five ways your home could make you money for more ideas.
You’ll need to ensure your home is well-maintained
When you take out an equity release plan, you’ll usually agree to maintain your property to a standard that your lender will set. Even if you don’t think any particular maintenance or repairs are necessary, you’ll need to use income or your savings to pay for these. If you don’t, your provider might carry out the repairs and charge you for them, or add the cost of them to the amount you owe.
You can read more about the potential risks of equity release in our article Equity release – what are the risks?
Seek professional equity release advice
If you’re considering equity release, your first step should be to seek advice from a qualified financial advisor.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
A financial advisor can help you understand the best option for you and recommend a suitable product from a member of the Equity Release Council (ERC). The council has a number of product standards which help safeguard borrowers so it is important that any provider you choose is a member.
Advisors can also be members of the ERC. You can search for an equity release provider that belongs to the ERC here.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
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