If you’re over 55, own your own home and need extra income, it could be a good idea to release some of the value of your property that has built over the years. Equity release lets you access the equity tied up in home, without the need to move or make monthly repayments.
According to the Equity Release Council, 93,421 UK homeowners released money from their home with equity release in 2022, taking advantage of what is undoubtedly their greatest asset. But equity release is a big financial decision and whilst it can be a good option for some, it’s not right for everyone.
In this article we explain how equity release can help ease financial pressure in later life and look at the pros and cons to help you decide if it’s a good idea for you.
What is equity release?
Equity release is a type of loan that lets you access the money tied up in your home. The cash is tax free, and there are no monthly repayments to make.
There are two main types of equity release:
Lifetime mortgages – a loan is taken out against your home that is only repaid once you die or move into long-term care. With this option you continue to own 100% of your property.
Home reversion plans – involves selling part or all of your property in return for a cash lump sum. You won’t own 100% of the property but you can remain living there rent free until you die or move into long-term care.
Our guide focuses on the benefits and pitfalls of lifetime mortgages as this is the most popular type of equity release.
How can equity release help?
Equity release can be helpful in providing a valuable source of income to support a comfortable retirement. The money you release is yours to use how you wish, whether that’s paying off an existing mortgage or debts, helping family financially, making home or garden improvements or paying for care.
*And you can release equity from your home if you have an existing mortgage too. You just need to repay your existing loan with the money you release.
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What are the pros and cons of equity release?
Like any financial product, equity release comes with its own pros and cons. Whether a lifetime mortgage is the best option will depend on individual circumstances. What may be a benefit to one homeowner could be a disadvantage to another, so being aware of the advantages and possible pitfalls will help you can make an informed decision on whether equity release is a good idea for you.
Benefits of equity release
- The money is tax free and yours to use as you wish*
- There are no monthly repayments to make unless you choose to
- You continue to own 100% of your home and could benefit from any price rises
- You can remain living in your home for life or until you move into care
- It’s safely regulated by the Financial Conduct Authority with standards set and overseen by the Equity Release Council
- You will never owe more than the value of your home**
- You have the freedom to move as long as your lifetime mortgage provider approves the new property**
- There’s flexibility to release equity in one go or as and when you choose
- You can choose to repay some or all of the interest to keep the size of the loan to a minimum
- You can guarantee an inheritance by protecting a percentage of the property value
- You can typically repay a percentage of the loan each year
Disadvantages of equity release
- Interest rates tend to be higher compared to traditional mortgages
- Interest is compounded so the loan grows at a faster rate
- It will impact any inheritance you leave as the loan is repaid from the sale of your property
- There may be penalty fees for repaying the loan early
- Any means tested benefits you currently receive may be affected
- Arranging a lifetime mortgage will typically cost you between £2,000 to £3,000 in fees
The good news is that these days there are a wide range of lifetime mortgages available that offer greater flexibility. For example, you can choose to repay some or all of the interest on a regular basis, protect a percentage of your property value or repay a percentage of the loan without incurring fees.
Examples of when equity release could be a good idea
Equity release could be a good option if you:
- Are not concerned about impacting your families inheritance
- Have no dependents to leave an inheritance to
- Need extra money to enhance your retirement income
- Need to pay off an existing mortgage
- Don’t want to downsize to release cash from your home
- Want the money to pay for care
Examples of when equity release could be a bad idea
Equity release could be a bad option if you:
- Want to leave 100% of your property to family
- Are happy to consider moving and downsizing
- Have other ways of sourcing additional income
- Only need the money for a short term fix
- Receive means tested benefits
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Is Equity Release Safe?
Equity release is safe as providers and products are tightly regulated by the Financial Conduct Authority (FCA) and overseen by the Equity Release Council (ERC). Strict rules and safeguards are in place to ensure homeowners are protected and guaranteed never to owe more than the value of their home.
Here’s how the Equity Release Council’s guarantees protect you:
Equity Release Council safeguards
- Interest rates must be fixed or if variable, there must be an upper limit or cap that is fixed for the lifetime of the loan
- You must be able to stay in the property for life or until you move into care, just so long as you abide by the terms and conditions of your lifetime loan
- You have the right to move to another property as long as your provider is happy that the new property offers continued security on your equity loan.
- The lifetime mortgage must come with a ‘No negative equity’ guarantee which means that when the property is sold and solicitors and agents fees have been taken into account, if the amount left is not enough to pay the outstanding loan, neither you or your estate will be liable to pay any more.
In addition to these product standards, for your security the Council also provides strict rules and guidance on the sales process. To ensure you understand exactly how equity release works, they stipulate that you can only take out a loan if you receive professional financial advice and independent legal advice.
So, to be certain that your equity release plan is safe, you need to ensure the company you choose is a member of the Equity Release Council.
Are there any risks with equity release?
As an FCA regulated financial product for later life planning, releasing equity with a lifetime mortgage is safe and for some, a good option. However, with numerous misconceptions and myths concerning the risks of equity release you’ll be forgiven for being wary.
Sadly, in a recent Over50choices survey, 77% of over 55s were uncertain as to whether the market was regulated or not. In addition, almost 80% were unsure whether you could get into negative equity with a lifetime mortgage, which is impossible as long as you choose company that is a member of the ERC.
So clearly more needs to be done to promote the controls and safeguards that have been put into place that make equity release a safe and viable option for later life planning.
The truth of it is that as long as you choose a FCA regulated company that is a member of the ERC council, do your research and seek professional advice as to whether it is the right option for you, equity release should be risk free.
Should I equity release?
If you need a cash injection and would benefit from having access to the money tied up in your home, then equity release could be a good idea. However, equity release is a lifetime commitment, so before going ahead it’s important to speak to a specialist to fully understand the process and the impact it will have on you and your family’s inheritance.
If you’ve considered the pros and cons and think equity release could be an option, here are your next steps:
- Consider all the alternatives first
- Get independent advice from a qualified equity release adviser
- Talk it through with your family
- Only choose FCA regulated companies who are members of the ERC so you are protected by their safeguards**
- Compare types of equity release
- Only borrow the money you need or choose a drawdown scheme
- Consider interest repayments or inheritance protection options
We have teamed up with leading equity release specialists Age Partnership who will be happy to answer your questions and provide you with more information. Their initial advice is completely free of charge and there is absolutely no obligation to proceed.
You can request a call back here or call 0800 133 7656 for a chat about your requirements. Alternatively, use the calculator to find out how much cash you could release from your property.