The pros and cons of equity release

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The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.

An introduction to equity release

Equity release is a method of unlocking tax-free cash from your property. Available to you when you’re 55 or older, equity release is essentially a loan that is repaid from the sale of your property when you pass away or go into long-term care.

You can use this tax-free cash however you choose, whether it’s towards retirement plans, travel and home improvements, or helping out family and loved ones.

Equity release pros and cons takeaways

• Equity release allows you to access tax-free cash from your home with no repayments, unless you choose to make them. 
  
• Use those funds in your retirement (for example, home improvements or a helping family member) and benefit from a no negative equity guarantee with Equity Release Council members. Releasing equity can even reduce the amount of inheritance tax your loved ones will have to pay later.
  
• Understand that equity release reduces your estate’s total value, can impact means-tested and other benefits, and accrues interest. Additional setup and early repayment costs may also apply.
  
• Use our equity release calculator to estimate how much you could unlock from your home, then speak to an FCA-regulated adviser to explore your options.

There are two types of equity release; lifetime mortgages and home reversion plans.

Lifetime mortgages

Lifetime mortgages are the more common form of equity release. Lifetime mortgages allow you to take tax-free cash from your home as either a lump sum or drawdown money as and when you need it. You only pay interest on the cash you choose to take out.

Home reversion plans

A home reversion plan is when you sell a share of your home’s ownership to an equity release provider for less than the market value. Please note, at LV= we don’t currently offer advice on home reversion plans.

Equity release eligibility

Generally, the minimum equity release requirements are that you’re 55 or over, your home is in the UK and worth at least £70,000. It may not pass for eligibility if the build of the property is non-standard (e.g. steel frame) or if there any issues with the lease (if it’s a leasehold property).

Pros of equity release – key benefits and advantages

• You could still own your home and can stay living in it

Unlocking cash from your home through a lifetime mortgage is an alternative option to downsizing to a smaller property. Rather than having to go through the stress and financial burden of moving to reduce living costs, you can stay put in your existing home for life, whilst reaping the benefits of tax-free cash leveraged from the property. This won’t be the case if you take out a home reversion plan however.

• An option if you have no savings

Equity release isn’t always selected for aspirational reasons such as holidays or nice-to-haves, equity release is sometimes an option that people look to when they have limited savings but have money locked in property assets.

For instance, if you experience a medical event that means you now need to make big adaptations to your home, equity release is an option that allows you to collect together these unexpected but necessary funds in addition to any grants you may be eligible for.

• You have nothing to repay until you pass away

There is nothing for you to repay if you don’t wish to. You do not have to repay money taken from equity release until you pass away or go into long-term care, by which point your home will be used to pay off your loan. To reduce compound interest - where interest is added to the loan and then future interest is charged on that growing amount - some people choose to pay monthly interest payments. This is ultimately your decision but our guide to equity release interest rates may help.

To illustrate how compound interest works, here is a table showing how a balance of £50,000 borrowed over 25 years at 6% interest increases with no repayments:

• Reduce the amount of inheritance tax for your loved ones

By releasing cash from your property to gift to loved ones earlier on, you may be able to reduce the inheritance tax they need to pay once you have passed away. This can be a complex path to navigate and there are a number of rules to abide by, so make sure you have done your research or seek advice from a specialist before proceeding.

The government’s page on inheritance tax explains thresholds, rules and allowances in greater detail, but it’s worth noting that if the value of your estate is below £325,000 there is usually no inheritance tax to be paid. This threshold can increase to £500,000 if you give your home to your children or grandchildren. Married couples may be able to combine thresholds by leaving everything to the other in their will. Find out more in our guide to understanding the complexities of inheritance tax.

• No-negative equity guarantees

Equity release providers like LV= who are members of the Equity Release Council will offer a no-negative equity guarantee. This means that you or your loves ones won’t owe more than what your home is worth when it’s sold.

• You can use the money however you wish

The money you take from equity release can be used however you wish, including but not restricted to:

• Travel and holidays
• Repay existing mortgage
• Buying a second home
• Renovations and home improvements
• Retirement income
• Financial support for loved ones

There may be certain restrictions in place depending on your provider to protect yourself and your lender however, so it’s best to check.

Cons of equity release - key disadvantages and pitfalls

• Less money for beneficiaries when you pass away

The main thing to consider when taking equity release is that there will be less money for your beneficiaries when you pass away. This will clearly depend on your personal circumstances and may not be an issue for some, but it is certainly something to think about as the value of your estate will ultimately be less.

• Your state benefits may be impacted

If you take out equity release, your current and future means-tested and other benefits entitlement may change – for instance, pension credit, savings credit and council tax reduction. Your lump sum may push you above the eligibility thresholds for benefits. If you rely on these benefits, you should seek independent financial advice to understand the risks. State benefits that are not means-tested, such as the State Pension, Attendance Allowance, Personal Independence Payment (PIP) and Disability Living Allowance (DLA) are not usually affected by equity release.

• High interest rates

Though interest rates will of course vary by lender and product, lifetime mortgage interest rates are generally higher than traditional mortgage interest rates.

Due to compound interest and lifetime mortgages not needing to be repaid until you pass away, the amount owed can grow very quickly. However, this can be reduced by monthly interest repayments. Find out more in our guide to equity release interest rates.

• Some additional costs are required

As you can imagine, a property valuation will be required to understand how much equity can be released from your home – this is one of a few costs to consider when thinking about equity release, as some providers will also request payment for setup.

• Your home can no longer be used as security for additional loans

Depending on how much equity release you took out initially, you may be able to release more equity at a later date, with the same provider. However most equity release providers will not allow further secured loans to be added from other providers.

• Early repayment charges may apply

As lenders will have predicted their return based on your lifetime, they will often try to offset any losses by applying early repayment charges should you try to pay off your loan. These charges will vary by provider, so make sure to check the details when you take out equity release or talk this through with your financial adviser.

Are there any alternatives to equity release?

If you’re in the process of weighing up equity release, it’s probably worth considering the alternative options as well.

Instead of releasing equity from your home, you could, subject to proper financial advice:

• Downsize or rent out a room in your home.
• Look at alternative forms of borrowing – such as a personal loan for short or long-term requirements.
• Look to continue employment and consider a part-time job.
• Using savings or investments.
• Grants – for instance towards health-related adaptations to your home.
• Consider remortgaging – such as moving to a retirement interest only mortgage (RIO).
• Speak to family and friends to see if they could help.

How do you release equity from your home?

If you are interested in a lifetime mortgage for equity release, the best first step is to speak to a financial adviser or an equity release advice provider. These advisers must be FCA regulated and ideally should be a member of the Equity Release Council.

So, is equity release a good idea?

Equity release is not a quick decision to make by any means, not to mention deciding whether a lump sum or flexible drawdown is best for you. Whether it is a good idea depends entirely on your personal circumstances – and it’s often helpful to discuss your plans with close family members before proceeding.

A sensible first step is to understand how much equity you could unlock from your home using an equity release calculator. Once you have done this, speaking to a financial adviser will allow you understand whether it’s the right decision for you to make. Why not request a callback from LV= today?