Pros and Cons of Equity Release: Is It Right for You?

Equity release can be a complex and often misunderstood concept, but breaking it down into its pros and cons can help you make an informed decision.

One major advantage of equity release is that it can provide a lump sum of money to help pay off debts or cover living expenses in retirement. This can be a huge relief for many people.

However, it's essential to consider the potential downsides, including the risk of depleting your estate, leaving nothing for your loved ones. This can be a significant concern for those with children or other dependents.

Equity release plans can also come with interest rates that can add up quickly, potentially reducing the amount of inheritance left for your heirs.

Equity release is a way for homeowners over 55 to unlock some of the value in their home without selling up and moving. It's a type of loan that's secured against your home, which is then repaid when you go into long-term care or die.

Data from the Equity Release Council shows that customers accessed £2.6 billion in property wealth via equity release products in 2023. This is a significant amount of money that can be used to fund retirement or other expenses.

Equity release can be provided in the form of a lump sum or an income. This is done by using a type of mortgage or by selling a portion of your home on the condition that you can continue to live there as long as you wish.

The number of new customers using equity release rose to 5,240 between April and June 2024 – 12% higher than the previous quarter. This suggests that equity release is becoming a more popular option for homeowners.

Here are some key facts about equity release:

Equity release can provide you with the funds you need to live the life you want, whether that's to fund your retirement dreams, support family financially, or simply enjoy the things you love.

You can use equity release to fund home and garden improvements, such as installing a new kitchen or creating a lower-maintenance garden. This can make a big difference to your quality of life.

Some people use equity release to splash out on more expensive purchases, like a new car. This can be a great way to treat yourself or make a big purchase that you otherwise wouldn't be able to afford.

Equity release can also help boost your income, especially if your pension income is limited. With a drawdown equity release plan, you can take the cash in one lump sum or do it in stages, only paying interest on the smaller sums drawn down.

Here are some of the key advantages of equity release:

Equity release can be a complex decision, and it's essential to consider the potential risks and pitfalls. You'll receive far less money than your home's market value, and you'll still need to find a new place to live.

Compound interest can lead to owing more than you borrowed, potentially up to the total value of your property. This can happen if you don't pay off the interest at regular intervals.

Paying off interest as you go or taking out smaller lifetime mortgages can help reduce this risk. Your money is better off invested in your home, where it can grow, rather than in a cash bank account.

Releasing equity from your home means there'll be less inheritance for your loved ones. Any equity release payments could impact means-tested benefits you're receiving, so factor that into your financial calculations.

If you choose not to make monthly lifetime mortgage payments, the interest will add up quickly. You might have to pay an early repayment charge if you decide to pay off your lifetime mortgage early.

Here are some key points to consider when thinking about equity release:

It's crucial to think through the implications of equity release carefully and discuss them with a financial advisor.

There are two main types of equity release: lifetime mortgages and home reversion plans. Lifetime mortgages are the most common type and allow you to borrow a lump sum against the value of your home.

You can borrow between 20% and 60% of your property's total value, and the amount you can borrow increases with age. The older you are, the more you can release.

A lifetime mortgage is a loan secured against the value of your home, and the amount you owe will grow with interest. You can sometimes reduce this by paying off the interest as you go, but if you don't, the interest will compound over time.

Home reversion plans, on the other hand, involve selling part or all of your property to a provider at below-market value. You can live in the property rent-free until you die, and you can ring-fence a percentage of your property for later use.

Here are the key differences between the two types of equity release:

You may qualify for an enhanced lifetime mortgage if you have a serious health condition or an unhealthy lifestyle habit, such as smoking. This can enable you to borrow more or access a lower interest rate.

The minimum age to qualify for a home reversion plan is typically at least 60, and the older you are, the more money you'll get. Your health is also taken into account, as being in poor health usually means getting a larger share of the value of your home.

To apply for equity release, you'll need to go through a process that helps determine if it's right for you and which product suits your situation. The process involves several stages, including speaking to a financial adviser who specialises in equity release.

You'll have two options for financial advisers: those tied to a specific lender or brokers who compare products across the whole market. Regardless of which type you choose, they'll discuss your situation, what you're trying to achieve, and whether you could raise the money elsewhere.

A good financial adviser will explain the different types of equity release and estimate how much cash you can release. They'll also suggest a specific product, taking into account your age, property value, and sometimes the type of property.

Here are the factors that determine the amount you can borrow:

Your financial adviser will also provide a written recommendation, including an illustration of how your loan will mount up. This will help you understand how interest rates can affect your balance, which can be about 4% on equity release products.

Applying for equity release involves several stages to determine if it's suitable for your circumstances and to choose the right product for you.

The process typically takes four to six weeks, but it can take longer if you have an outstanding mortgage to redeem, which might take an average of ten weeks.

To start the process, you'll need to get your money, which will involve legal checks and arranging for any existing mortgage to be cleared.

The fees for your solicitor and adviser will be taken from the proceeds or added to your loan.

You can use the money released from your property in any way you wish, and the maximum amount you can borrow tends to be up to 60% of the value of your home.

The amount you can borrow depends on factors such as your age and the value of your property, and the percentage typically increases according to your age when taking out the product.

You don't have to take all the money released in one go; you can withdraw it in one cash lump sum, smaller regular payments, or a combination of both.

Here are some key steps to consider:

Seeking advice from a financial expert is a crucial step in the equity release process. You'll want to find an adviser who specialises in equity release, as they will be able to guide you through the options available.

There are two types of advisers to consider: tied advisers who only recommend products from specific lenders, and brokers who compare products across the whole market. It's worth noting that both types of advisers will be able to explain the different types of equity release and help you determine whether it's right for you.

Your adviser will want to know about your situation, including your age, health, lifestyle, finances, and family. They'll also want to understand what you're trying to achieve with equity release. This will help them determine whether equity release is the best option for you.

You'll also have the opportunity to ask questions and discuss the potential risks and benefits of equity release. Your adviser will provide a written recommendation, including an illustration of how your loan will mount up, and explain how interest rates can affect the amount you owe.

Here's a summary of the key points to consider when seeking advice:

Fees and Charges are a crucial aspect of equity release that you need to be aware of. You'll be faced with a range of costs, including arrangement fees, valuation fees, and legal fees.

Application fees can be around £600, while customers' legal fees range from £500 to £600. Valuation fees can vary depending on the property value, but some lenders offer free valuations from time to time.

Adviser fees can also add up, with an average level of around £1,000. These set-up costs can total between £2,000 and £3,000 in total.

Here's a breakdown of the typical set-up costs associated with equity release:

It's essential to discuss these fees with your financial adviser to understand how they'll affect the total cost of your plan.

Early Repayment Charges can be a significant catch with a lifetime mortgage. Most lenders have a fixed penalty for repaying the loan early, which is usually a percentage of the repayment amount.

You'll need to consider this if you plan to repay the capital borrowed early. Some lenders may have a fixed penalty, so it's essential to discuss this with your financial adviser before taking out a lifetime mortgage.

Downsizing protection is an exemption for Early Repayment Charges, allowing you to repay the loan when you move house without incurring a penalty. This is something you should think about if you're planning to downsize in the future.

Ask your IFA to explain what fees you'll have to pay, including Early Repayment Charges, and how they could affect the total cost of your plan.

When considering equity release, it's essential to understand the fees and charges involved. These can include arrangement fees, valuation fees, legal fees, advice fees, and early repayment charges.

Arrangement fees can add up, so it's crucial to ask your IFA to explain what fees you'll have to pay and when. This will help you understand how they could affect the total cost of your plan.

Some set-up costs for equity release include application fees, which average around £600. Customers' legal fees can range from £500 to £600, and valuation fees can vary depending on the property value.

The average level of adviser fee is around £1,000, which is a significant cost to consider. It's essential to factor these costs into your decision-making process.

Here's a breakdown of the set-up costs you can expect:

Equity release can affect your eligibility for means-tested benefits.

Releasing cash against the home's value can also reduce the amount of inheritance you can leave to your beneficiaries.

You'll need to live for at least seven years after equity release to escape inheritance tax completely.

The amount owed in equity release when the home is sold may mean less is left for beneficiaries.

Equity release will reduce the value of the estate, potentially saving on inheritance tax when you die.

Financial advisers warn that a potential inheritance tax saving should not be the primary reason for taking out a lifetime mortgage.

Equity release may seem like a straightforward way to release some of the cash tied up in your home, but it's essential to consider the safety measures in place to protect you. The interest on the loan can roll up quickly, potentially wiping out the entire value of your home.

The Equity Release Council requires an independent solicitor to ensure you fully understand the nature of the mortgage you're applying for. They also check for any potential coercion or lack of mental capacity.

A "no negative equity" guarantee is a crucial safety net that ensures you'll never owe more than your home is worth when it's sold. This guarantee offers peace of mind if house prices drop.

You can only take out equity release products through an Independent Financial Adviser (IFA), who will help you weigh the pros and cons. If you don't have an adviser, you can find one at Unbiased.

Here are some key safety measures to look out for:

It's also worth noting that the interest on the loan can roll up quickly, roughly doubling every 14 years. For example, if you take out a £100,000 lifetime mortgage at 5% interest, the debt would roll up to £200,000 by the time you're 70.