Is equity release a good idea?

Releasing equity is one of the most popular ways to access cash in later life. As a result many people are asking: ‘is equity release good or bad’? The answer to this question is not straightforward. Whether or not equity release is a good idea is very much dependent on your personal circumstances and the lender and product you choose. 

As equity release grows more popular and prolific, we ask whether it is as good as it is purported to be. It’s certainly not for everyone – but it can be a valuable source of income for some.  

Our helpful guides share impartial, balanced and easy to digest financial advice. Here we discuss the pros and cons of equity release arrangements and cover the different products available to help you decide whether or not it is suitable for you. 

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An audio recording of this article can be found at the bottom of this page and on Youtube. You can also listen to this article and many others on Apple Podcasts and Spotify.

What does equity release involve?

Equity release involves ‘releasing’ cash from your property. The schemes allow you to remain living in your home, with the loan secured against it. The loan is usually repayable when you die, with added interest or in the form of monthly payments. You can normally choose whether to receive the money upfront as a lump sum or in monthly instalments. 

Different types of equity release

Before deciding ‘is equity release a good idea’ it’s necessary to understand that there are different types available. This makes it broadly suitable for lots of people – but the suitability can depend on the type of product selected. The most popular and common types of equity release include:

Lifetime mortgage 

A lifetime mortgage enables you to retain full ownership of your home whilst enjoying a lump sum or regular income tax free. Payments are usually made every month including interest and fees. The loan is secured against the entirety or a percentage of the value of your property. Lifetime mortgages are a great option for people who don’t want to relinquish full ownership or control of their property. 

It allows in certain circumstances for some of the property to be retained for inheritance purposes. This option is therefore best for people who need a substantial yet smaller sum of money, or who may like to keep releasing equity over a longer period of time. It is also better for anyone concerned about leaving their property in their will. 

A lifetime mortgage is a flexible option allowing you to free up tax-free cash whilst retaining a portion of your property.

Here is a video explaining how a lifetime mortgage works.

Home reversion plan 

Home reversion plans involve actually selling a portion of your home to lenders, in return for tax free cash. 

The release of equity is essentially the same, but you no longer own your home outright. For this reason home reversion plans generally stipulate that the property must be sold upon your death in order to pay off the loan with interest. 

This option is best for people who need larger sums of money, either representing a large percentage or the total value of the property, over a shorter period of time. 

Of course, each individual equity release product will have slightly different benefits, rules and rates attached to it. For example, some providers now offer a ‘negative equity guarantee’, which ensures you’ll never pay more than your home is worth at the time of arrangement. 

Products differ between providers but may also alter depending on your personal circumstances. 

"Equity release involves ‘releasing’ cash from your property. The schemes allow you to remain living in your home, with the loan secured against it. The loan is usually repayable when you die"

What are the requirements for equity release?

There are a few eligibility requirements attached to equity release schemes. They can differ slightly between products but as a general rule:

You must own your own home

Only those who own their own home can enter into an equity release arrangement. This is because the loan is secured against the value of your property. Some schemes can be offered for other assets but they are rare. 

You must have paid off a significant portion of your mortgage or be mortgage free

In most cases you must have already paid off the mortgage on your home. There are however some schemes that allow you to release equity even though you are still paying your mortgage. Although it isn’t advisable, a number of people use equity release to continue to pay their mortgage as they enter retirement.

You must be of sound mind

To enter into an equity release agreement you must be of sound mind. Where you are making arrangements on behalf of yourself and another person who jointly owns the property, say a spouse, you will both need to agree. 

Where one person is not able to agree lasting power of attorney will be required. You can find more information on lasting power of attorney for financial arrangements here. It is possible for sons, daughters and guardians to take out an equity release scheme for their parent should they have the appropriate lasting power of attorney in place. 

Most providers will have their own set of eligibility criteria which will include the above, plus others specifically attached to their products. 

When is equity release a good idea?

Equity release is popular because it offers flexible, tax-free cash to homeowners. Whether or not it is a good idea largely depends on your individual set of circumstances. 

Here we have put together some scenarios for you to consider, to help you to decide whether a lifetime mortgage or reversion plan is suited to your needs. Of course, this list isn’t exhaustive, so it’s always best to seek tailored advice. 

You need a substantial amount of money

Equity release schemes work best for people who need a substantial amount of money – usually in the region of £50,000 upwards. It is not suitable for people who need to borrow less than £10,000 due to high interest rates. For this a personal loan may be a better option. 

You need to top up your pension

Increasingly people are finding they would like to retire when they had planned (before the retirement age changed), or want to top up a meagre pension to pay for the everyday cost of living and better quality of life. 

You want to better enjoy retirement

Sometimes a pension will stretch but not quite far enough to pay for things you really want to do. Retirement is a time to relax, enjoy and do the things you’ve always wanted to do. Some people want to travel, others want to spend quality time with their family with exciting experiences. 

You need to pay for care (and want to stay in your own home)

One of the main reasons people choose equity release is due to a care requirement. More and more people are finding they need care – but many can’t afford to pay for it as the costs continue to rise. 

For most people a mortgage-free property is their greatest asset – so being able to release the money tied up 

You aren’t planning on leaving your property to anyone in your will

As a general rule releasing equity isn’t a good idea if you are keen to pass on your property to family or friends when you’re gone. Lifetime mortgages offer this option but only if you’re looking at leaving the money tied up in the property, rather than the house itself. 

Although some lenders offer a negative equity guarantee, which means you won’t have to pay back more than the property is worth, you could still end up with very little left to pass on once you’ve paid interest on top of the loan itself. 

When is equity release a bad idea?

Equity release does have benefits, but it isn’t for everyone. It can be unsuitable or even detrimental in some situations. Disadvantages of equity release can include: 

Mismanagement of money

If you have a history of debt issues or money mismanagement then equity release could be unsuitable for you. It is easy to forget that it is a loan with interest applied to it, even though you are ‘releasing’ cash from the property you own. Reconsider if you think you may spend the money too quickly or might not be able to plan for or afford the repayments.  

You are very elderly or terminally ill

If you are unlikely to have much time to spend (and repay) the loan equity release might not be the best option for you.  

You want to leave your home as an inheritance

Equity release naturally impacts on inheritance, especially if you’d like to leave your property to a loved one in your will. 

You need a small amount of money

Equity release is most suited to people who want to release large amounts of cash – £10,000 at least. If you need a small loan a bank loan or even a zero interest credit card is likely to be a better option. Equity release interest rates tend to be much higher than the market average. 

You may change your mind

There are usually penalties for people who choose to leave an equity release scheme early. Some schemes disallow this altogether. If you plan on moving house, for example, you need to check that the scheme can be transferred This is another reason why careful consideration is key. 

If you have a particularly unique or complex personal financial situation it is advisable to speak first with an impartial specialist before deciding on an equity release scheme. You can find plenty of later life financial advisors here in our directory. 

Are there any alternatives to equity release?

Equity release is a unique concept, so there are few financial products similar and nothing exactly like it. If you find you aren’t eligible for equity release or it isn’t suitable for you there may be some other options you can explore. These include personal loans and re-mortgages. 

For tailored financial advice, especially in complex situations, it’s best to speak to a professional financial advisor. 

Summary 

In summary, equity release is not for everyone – but it is a viable and valuable option for many people. The choice is ultimately down to you and your family and should be based on your individual circumstances and preference. 

As the cost of care continually rises and pension pots are insufficient to cover basic needs, equity release is growing in popularity. It remains one of the easiest and flexible options available to people who need easy and ‘no strings attached’ access to cash. 

An equity release calculator (UK only) can help you to decide whether this kind of scheme might work well for you, how much you could borrow and how much you might expect to pay. 

Be sure to properly investigate each individual lender and weigh up what they can offer you. Ask for impartial reviews from people you know and look for testimonials posted online to get a true impression of how good the provider will be. 

It is very important to take time to gather information and decide whether equity release is the best option for you and your family. Carefully weigh up the pros and cons of equity release and consider the drawbacks as well as the benefits. 

Where can I find more information on equity release?

To find out more about equity release you can take a look at the variety of articles here on this website or speak with individual providers to discover details about the products they have on offer. 

Make sure you rely on impartial sites such as government sites, the FCA (Financial Conduct Authority), Equity Release Council, charities and information sites for straightforward, honest advice. Follow us on Facebook and Twitter for updates on the latest articles and news. 

Independent financial equity release advice from a specialist advisor may be necessary if your situation is particularly complex or unique. 

Listen to this article

Other informative articles on Equity Release

Equity Release Calculator

An equity release calculator allows you to effectively ‘try before you buy’ and plan ahead. It’s a great way to see how much capital you can (and should) release from your home. This articles explains how they work.

How Does Equity Release Work?

Equity release generally involves stumping up the entirety or a portion of the value of your property in return for cash. The cash can be spent however you wish. This article looks at how it works in more detail.

Pros & Cons of Equity Release

Equity release schemes do have many benefits – but they aren’t suitable for everyone. Each individual provider and type of scheme will also have individual positives and drawbacks.  This article looks at what you need to look out for.

Equity Release Interest Rates

Equity release interest rates tend to be higher than rates associated with a standard bank loan. For this reason it is not for everyone. For example, equity release is most suited to people who need large sums of money.

Is Equity Release a Good Idea?

Releasing equity is one of the most popular ways to access cash in later life. As a result many people are asking: ‘is equity release good or bad’? The answer to this question is not straightforward and this article looks at this.

Paying for Care

The cost of care can be a stressful issue at a sensitive time. Funding care is an important consideration when planning your income in retirement and long term care. This article looks at the different options available.

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