The pros and cons of equity release

Your home isn’t just a source of comfort, security and familiarity. It can also be a valuable source of retirement income, thanks to equity release.

When weighing up the advantages and disadvantages of equity release it’s important to understand the difference between the two types of equity release products.

lifetime mortgage is a loan taken out against your property. The loan, plus associated interest costs, are repaid when the property is sold. This is typically when you die or enter long term care.

A less-popular form of equity release is a home reversion plan. This involves selling a portion of your home to a company. Just like a lifetime mortgage, you get to stay in your home until you die or go into long term care.

Both types of equity release product are regulated by the Financial Conduct Authority. With either you can receive money in a lump sum or over several instalments.

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Important: The loan amounts above are an illustration of the amount you could borrow. The actual amount may vary depending on your individual circumstances. The figures are not guaranteed and do not constitute an offer to lend. The loan amount will need to pay off any existing mortgage secured against the same property.

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Why is equity release so popular?

Given a surge in the number of us reaching retirement, it’s no surprise that equity release products are growing in popularity. Not only can they generate a reliable source of income while allowing you to maintain a comfortable lifestyle in your own home, they can also provide a one-off lump sum to perhaps pay off interest-only mortgages, fund home improvements or even a dream holiday.

A growing number of parents are tapping into equity release to help their children onto the property ladder.

And the equity release market has grown up a lot in the past five years. Lending standards have improved and competition between providers has brought interest rates down.

Is equity release a good idea?

Equity release isn’t usually suitable for property owners that have lots of spare cash. Or homeowners with other investments like shares and bonds. Those assets can generate adequate income in their own right, lessening the need for a loan.

Before considering the pros and cons of equity release and whether it’s right for you, consider whether downsizing is a better solution.

Whether equity release is a good thing for you depends on your circumstances. A specialist equity release adviser can help evaluate if equity release is the right route for you. They will be able to help you understand whether equity release schemes could be a good idea for you. Depending on your product and plan, equity release can be an expensive way to borrow.

A fmother and father with their adult daughter against a yellow background

Equity release and inheritance tax: could a lifetime mortgage wipe out my kids’ inheritance? Or lead to me losing my home?

Be careful. Interest compounded over many years adds up. A rate of 5.5%, for example, compounded annually on a £100,000 lump sum would add interest costs over a ten-year period of around £71,000.

That could mean there’s not much value left in your home to pass on to loved ones. This could be exacerbated further if house prices stagnate or fall.

The good news is that equity release products come with a “no negative equity guarantee”. That means, should house prices collapse or if the rolled-up interest is higher than the house price, your beneficiaries will never owe more than the value of the property.

There’s also an assortment of products to choose from that can help you reduce expenses. For example some allow you to repay 100% of the monthly interest on the loan for a period of your choice, while others lock away a guaranteed sum for inheritance. It’s important to work with your financial adviser to find the right product and plan for your situation.

What costs are involved?

Lifetime mortgages are the most popular form of equity release. Some lifetime mortgage products have arrangement fees to cover set-up and legal costs, while others have none.

There could also be valuation fees, solicitor fees and a fee paid to the adviser who recommends the product. According to Money Saving Expert the charges associated with equity release can total between £2,000 and £3,000. The adviser will help you understand all the charges associated with a product they recommend.

Find out more about the costs of equity release.

Interest on equity release

A lifetime mortgage is a loan, which comes with interest charges. How much interest, and whether you have to pay it or whether it is added to the loan depends on the specific product you go for.

There are a wide range of product options including ‘interest roll-up’, where the interest is added to the loan, and ‘interest payment’, which gives borrowers the option to pay off the interest each month to ensure the loan doesn’t grow.

People who want to avoid interest costs entirely could opt for the route less travelled: a home reversion plan. A downside here is that relatives won’t get to pocket any increase in the value of the portion of the home when it is sold.

Find out more about interest and how much equity release costs.

Tax on equity release

The money you receive from equity release is tax-free, but could be subject to tax later if, for example, you put it into a savings account.

Equity release can have a positive impact on future tax obligations by reducing your Inheritance Tax bill.

As property prices have increased more and more people are hitting the inheritance tax threshold (£325,00 for individuals, £650,000 for couples), and paying 40% tax on everything above that threshold that they want to pass on to their children.

Equity release can reduce the value of your estate and could potentially reduce your inheritance tax liability.

Can I pay a lifetime mortgage off early?

You can, although there may be an Early Repayment Charge. It’s important to speak to a specialist equity release adviser so they can help you find a product that is good fit for your needs.

How will equity release affect my pension benefits?

For those over 65, state pensions aren’t affected. Some means tested benefits may be affected, depending on your individual circumstances. It’s crucial to take a close look at what payments you’re receiving, or expect to receive, from the government. You should also consider how it could factor into your care plans.

What protections are in place? What are the pitfalls of equity release?

The Equity Release Council protects customers from malpractice. Their code of conduct states that customers must receive financial and legal advice when using equity release, that all products come with a no negative equity guarantee, and that you can stay in your home for life.

You can only take equity release products when you receive advice from a specialist, regulated adviser, who can ensure you understand the product, the process the financial implications.

Find out more about the safety aspects of equity release.

How long does equity release take?

A lifetime mortgage application usually takes between 5 and 8 weeks on average. The process involves a considerable amount of legal work and its duration can vary depending on your requirements and financial situation.

It can also depend on how long your solicitor takes to do the legal work. If you want to keep delays to a minimum, taking some time to find an experienced solicitor in equity release might be worth your while. Find out more in our equity release FAQs.

The key stages of the lifetime mortgage application process:

Consultation – You consult a qualified, regulated adviser who will ask a number of questions to understand your unique situation and your reasons for looking to equity release.

Fact find – At this stage the adviser will review your finances in more depth, discussing your priorities to understand if equity release is right for you, and if so what type of product best suits your needs.

Presentation – The adviser will present their recommendations based on the information gathered during the fact find to ensure it meets your specific requirements and needs.

Application – Once your adviser has made you aware of the benefits and risks of their recommendation, it's decision time. When you've weighed up the options, your adviser will complete the application with you and send it to the provider.

Valuation – The provider will evaluate the application, including obtaining credit references and send an independent surveyor to value your home.

Offer – Once the provider is satisfied with their valuation of your home and your application, they'll send out your mortgage offer.

Solicitors appointment – Before completing your lifetime mortgage you are required to liaise with a solicitor to ensure you understand the nature of the agreement you are entering.

Completion – Once the legal work is completed and the mortgage offer is signed, the provider will arrange a date to release funds to your solicitor. Usually legal and adviser fees are deducted from the total amount released upon completion.

Lifetime mortgage myths busted

  • You could end up owing more than the value of your home - Lifetime mortgages provided by Equity Release Council members come with a no negative equity guarantee, which means you’ll never owe more than the value of your home.
  • You can’t move - Many lifetime mortgage providers let you move and transfer a lifetime mortgage to a new property.
  • You can’t make payments to manage the size of the loan- Some providers allow you to make payments to manage the interest or the loan amount.
  • You can’t pay it all off – Although some providers have Early Repayment Charges, several lenders let you pay off the loan without penalty, often after ten years, without incurring Early Repayment Charges.
  • You can end up losing your home - Although payment options are available, payment is not necessary, so there’s no risk of missing payments and having the property repossessed.
  • With a lifetime mortgage you don’t benefit from increases in property value - With a lifetime mortgage you still own your property, so if the value of your property increases you still benefit from it.

These options provide you with more control over the value left in their property and can help make sure there’s still value in the family home for children or grandchildren to inherit.

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