Equity release is a way for homeowners aged 55 and older to use some of the money tied up in the value of their home. 

But, before you apply for equity release, having a good understanding of how it works can help you decide if you’re making the right decision. It’s not the best solution for everyone, so to find out if it suits your needs it’s best to understand some of the pros and cons of equity release.

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We’ve listed these in more detail below, from the tax-free advantage of borrowing to pitfalls to how it could impact your application for means tested benefits now or in the future. 

What is equity release?

Equity release is a form of lending solely available to homeowners aged 55 or older. It comes in two forms, a lifetime mortgage or a home reversion plan.

A home reversion plan involves selling all or part of your home in exchange for a lump sum or regular income, while living typically rent-free until you die or move into long-term care and your home is sold. 

The lifetime mortgage is the most commonly used and accessible across the UK, so the pros and cons featured in this article only apply to this type of loan. 

A lifetime mortgage is a loan secured against your home. After you receive your money from your equity release provider, either through a lump sum or a set of instalments, you have the option to make payments to cover the interest and some of the capital, up to a set limit. Early repayment charges may apply above a set value. 

In most cases, this can be paid whenever you choose, but it’s good to be aware that if you don’t make monthly repayments your interest will compound and the amount outstanding will continue to increase. 

Once you die or move into long-term care, your home will be sold and any money released, plus accrued interest would be required to be repaid.

What are the advantages of a lifetime mortgage?

There are a few benefits of a lifetime mortgage, from being able to live and own your home to the flexibility of your repayment plan. We’ve explained these in more detail:

Unlock tax-free cash from your home

Equity release allows you to turn the value tied up in your home into tax-free cash. The money you unlock is yours to enjoy spending once you’ve repaid any existing mortgage, a condition of equity release. 

The amount you can release depends on factors such as your property’s value, if you’re a joint or single applicant,the age of the youngest homeowner and your needs for the money

A quote from an equity release provider will help you discover how much you may be able to unlock. 

Continue owning 100% of your home

Moving from a home full of memories can seem daunting.

So, for those who have already explored downsizing, but decided it's not right for them, a lifetime mortgage could allow you to stay in your home for as long as you like whilst accessing money to supplement your finances.

Use our FREE equity release calculator

No need for regular repayments

One of the benefits of equity release for many people is that it doesn’t require you to make regular monthly repayments.

This is because the money you borrow, plus accrued interest is repaid upon death or moving into long-term care.

Your plan may allow you to make voluntary payments subject to certain limits, which some people prefer to do to reduce the roll up of interest.

It’s worth checking the details of your plan, as early repayment charges may apply above a set value.

Flexibility

You can choose how you’d like to take the money you release, either as a lump sum or smaller amounts over time, called drawdown. 

Lump sums could be suitable if you’re paying off an existing mortgage, purchasing a new car, or providing a one-off gift to a loved one.

A drawdown might be more suited if you’re looking to consistently supplement your retirement income.

What are the drawbacks of equity release?

However, equity release does have a few pitfalls to consider, from the effect of a fall in house prices to a reduced inheritance for your loved ones. These are explained in more detail below:

No negative equity guarantee

You may have concerns that if the value of your property decreases, it might not be worth enough to cover the amount you owe.Products that meet the Equity Release Council’s Product Standards feature a no-negative equity guarantee. 

This guarantees that your estate will never owe more than the property's worth when it is sold. 

With some plans, you can also safeguard a portion of your home’s value to guarantee an inheritance for loved ones but this will reduce the amount you are able to release.

Interest Accumulation

A lifetime mortgage typically involves accruing interest on the amount you borrow. Over time, this interest can build up. 

With a lump sum plan, the interest rate is set when you take out the loan so you know exactly how much interest you will be paying over the life of the loan.

With drawdown, it can be a bit more complex. You only pay interest on the money when you withdraw it, and since lifetime mortgage interest rates change, the interest rate for any funds taken from the drawdown facility will be charged at the prevailing rate at the time the funds are drawn.

Impact on benefits

The additional money from releasing equity might push you above the eligibility threshold for some means tested benefits now or in the future, and an advisor will discuss this with you. 

Advice is required before proceeding with equity release so that your adviser can take the time to explore whether equity release is right for you or if another option might be more suitable.

Reduced inheritance

Equity release may involve a home reversion plan or a lifetime mortgage, which is secured against your property and the value of your estate will be reduced, meaning there will be less wealth to pass on to loved ones.

It’s also worth considering that funding long-term care will be impacted by releasing the money tied up in your home.

It’s important to discuss equity release with your loved ones before going ahead and a reputable equity release adviser will always encourage you to do so.

Costs and fee

Equity release will involve various costs, which could include arrangement fees, valuation fees, and legal fees.

Through Age Partnership, who are an equity release broker, initial advice is provided for free and without obligation. Only if your case completes would an advice fee of £1,895 be payable. Other lender and solicitor fees may apply.

Complexity

Equity release can be complex and is a long-term financial commitment, so it’s important to get the right advice.

Consulting with a qualified equity release adviser, such as those at Age Partnership, can help you make an informed decision that aligns with your long-term financial goals.

Overall, while equity release can provide financial flexibility for those in retirement, it's crucial to carefully weigh the downsides and consider alternative options before proceeding. 

Age Partnership is a trading name of Age Partnership Limited, which is authorised and regulated by the Financial Conduct Authority. FCA registered number 425432. Company registered in England and Wales No. 5265969. VAT registration number 162 9355 92. Registered address, 2200 Century Way, Thorpe Park, Leeds, LS15 8ZB.