What are the pros and cons of equity release?

Homeowners aged 55 and over looking to get more from their finances as they approach, or are at, retirement could benefit from unlocking the tax-free cash tied up in their homes.

This is known as equity release.

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Whilst it could help you enjoy your retirement to it’s full, it’s important to consider what the pros and cons of equity release are.

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 and the age of the youngest homeowner.

A quotation from an equity release advisor will help you discover how much you could unlock. 

Continue owning 100% of your home

There are two types of equity release plan: a home reversion plan and a lifetime mortgage. By far, the most popular is a lifetime mortgage, which allows you to 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.

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 only 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 keep the interest that accumulates down.

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

Use our FREE equity release calculator

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.

No negative equity guarantee 

In the unlikely event that the value of your house has decreased significantly, it is possible that 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 and the remainder of the loan will be written off. 

With some plans, you can also safeguard a portion of your home’s value to guarantee an inheritance for loved ones. 

Interest Accumulation 

Equity release 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, you only pay interest on the money when you withdraw it, and the interest rate applicable to your withdrawal could be higher or lower than your initial interest rate, depending on the rates at the time.

Impact on benefits

The additional money from releasing equity might push you above the eligibility threshold for some benefits. 

Advice is required before proceeding with equity release so that your advisor can take the time to assess whether equity release will have any impact on your means-tested benefits, either now or in the future. 

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 advisor will always encourage you to do so. 

Costs and fees

Equity release can be associated with various costs, including arrangement fees, valuation fees, and legal fees.

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