Pros and Cons of Equity Release | Pitfalls of Equity Release
Here at Equity Mortgage Release, we are dedicated to providing easy to digest, clear and impartial information on various aspects of later life and care requirement. Where finances are concerned many people are finding that their needs and situations are complex, especially if they need to find funds for care.
One option that is becoming increasingly popular are products known as equity release plans. They allow people who own their own home to access a lump sum or regular monthly payments tax free. With so much conflicting information out there many people wonder, ‘Is equity release a good idea?’
As equity release continues to grow in popularity amongst the older population, we explain the benefits and drawbacks of these schemes to help you decide whether it is a suitable option for you.
Topics you will find in this article
What does equity release involve and how does equity release work?
Broadly speaking equity release schemes enable homeowners to release capital tied up in their properties. There are a wide variety of different options available under the ‘equity release’ umbrella. Each one has different pros and cons depending on a person’s individual circumstances and the providers’ plans.
Traditional equity release arrangements involve the homeowner or homeowners receiving a lump sum or number of monthly payments over a period of time in return of the entirety or a share of the property. They can remain living there until they die, but upon their death the loan is payable, usually meaning the property will need to be sold depending on the type of plan and percentage taken.
There are broadly two different types of equity release scheme – lifetime mortgages, and home reversion plans. Each has different characteristics and individual pros and cons to consider.
Here is a video on the pros and cons of equity release.
What are the pros and cons of equity release schemes?
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. Here we have shared some of the most common pros and cons of equity release to help you decide.
Benefits of releasing equity
Releasing equity is a popular option because it is flexible, easy and accessible for many people. It is especially useful as people approaching later life find they need funds for long-term care, but wish to stay in their own homes. It also enables enjoyment in retirement thanks to additional funds to top up pensions. You can also use an equity release calculator to see how much you could receive.
Here we share some of the key advantages of equity release schemes.
1 – Free up tax-free cash to spend however you choose
One considerable benefit (and one that draws most people to equity release) is the prospect of a large lump sum of tax-free cash. There are no conditions attached to it – simply spend as you choose. This is understandably attractive for many people, especially those without substantial savings to fall back on. Everyone has different reasons for choosing equity release. Some people want to free up funds so that they can better enjoy retirement. Others use the money to pay for care (more on this below), top up their pension or to give gifts to relatives.
This flexibility makes equity release suitable for a wide variety of people.
2 – Secure a tax-free income for life
Sometimes a pension isn’t quite enough to really enjoy the time you have in retirement. Some funds only stretch to cover basic needs and daily expenses – others leave little room for things like holidays, luxuries and days out. Equity release enables you to secure a tax-free income for life – or for a set number of years. For many this alleviates any worry around the cost of living and can greatly enhance the quality of life in retirement. Some people opt for partial equity release, so they can retain some of the value of their property to leave to loved ones or to release more funds at a later date.
3 – Pay for care whilst remaining in your own home
As the care crisis continues and an increasing number of people find they don’t have the funds to pay for care, equity release is offering a silver lining for many. The main concern for most is that they can’t afford the quality of care they prefer – remaining at home rather than moving into a residential facility.
Equity release can allow a person who would otherwise be forced to access care in a residential home without the funds to pay for a placement of their choosing to remain at home. As the money can be spent however you choose you may decide to make improvements to the property and set aside funds for continued home care for yourself or a partner or spouse.
It is worth considering that equity release schemes are better suited to those needing long-term care. The money can also be used to make necessary improvements allowing you to stay in your own home for longer.
4 – Flexibly take money from your property whenever you need it
Equity release can be done any time you choose – which is great news for people who are unsure of what the future may hold. Despite this it’s worth considering that timing does matter. Ideally you need to take out a scheme early enough to be able to enjoy it, but not so early that you run out of the money released from your property.
Additionally, only lifetime mortgages allow you to retain ownership of your property whilst the loan is secured against its value. If you take out a home reversion plan you may not have the option to come back and release equity again at a later date.
It’s also not advisable to keep taking different schemes out over time. Each one will have fees and interest attached, and they may not be compatible with one another. Most crucially multiple schemes will complicate matters for you and for the person responsible for your estate when you pass away. Where possible carefully consider how much money you need and only arrange for equity release once.
Pitfalls of equity release
Despite the considerably benefits, there are some pitfalls of equity release to be aware of, the so-called dangers of equity release are much reported in the press, but essentially there is nothing to fear provided you properly research products and lenders and are sure it is the right option for you. There are several different options – for example, interest-only mortgages that allow you to only pay off interest each month to avoid it mounting up over time.
The best way to protect yourself from any difficulties is to carefully consider the potential disadvantages of equity release before making arrangements. You should also be sure to check that the provider you choose is regulated by the Financial Conduct Authority.
Disadvantages of Equity Release
1: Interest rates can be high
Equity release interest rates can vary a lot. This is a loan, so naturally you will be charged interest on the money you borrow, even though it is secured against an asset you already own.
Equity release plans are long-term loans – but this means interest builds up considerably over time.
Many schemes have relatively high interest rates applied to them. As a rule equity release interest rates are higher than the market average.
This means that when the loan is repayable, interest collected on it could be significant – meaning your family could end up owing the whole property to the loan provider or worse, having to find the funds to pay off the additional amount.
Nobody can predict exactly how long they will live from the time they take out the loan – understandably twenty or thirty years of interest can mount up considerably. Some providers are starting to allow customers to pay off interest monthly, ensuring you stay in control of the overall loan amount and know what to expect when repayment is due.
It is worth noting that reputable providers offer a ‘negative equity guarantee.’ This ensures that the amount payable will never exceed the value of their property at the time of arrangement. It is advisable to ensure that the equity release products you consider do offer this for full peace of mind.
2 : Equity release may impact upon your inheritance
One major concern for people considering equity release is the impact it will have on the inheritance they leave to loved ones. Most people’s capital is mostly tied up in their property.
It’s impossible to know exactly how significantly an equity release scheme may affect your inheritance, since you can’t know how long the duration of the loan will be and therefore what the associated interest charged on it will be. This is a concern even for individuals who decide only to release a portion of the capital tied up in their property.
One way to combat this is to give gifts on a yearly basis to your loved ones. The current tax-free limit is £3,000 per person.
3: You could lose out through negative equity or house price rises
One of the common risks attached with equity release is the prospect of falling into negative equity – ending up paying back more than you borrowed and more than your property was initially valued at the time of arrangement. However most lenders now offer a ‘negative equity guarantee’ to protect customers against this.
There is also a small possibility that you may lose out if the value of your property goes up, because the loan has already been secured on its previous value.
4 : You may need to move
It’s best to avoid equity release if you plan to move – but sometimes plans change. Most lenders don’t allow for a transfer of an equity release arrangement once it has started. There are also usually heavy penalties attached to ending or leaving a scheme early.
To protect against this consider asking about the possibility of transfer when taking out the scheme to avoid paying huge penalty fines should your plans change in the future.
5 : There may be a better option
Equity release products such as lifetime mortgages and home reversion plans are best suited to people who need substantial sums of money, which they plan to borrow over a longer period of time. They aren’t usually a good option for a person needing a small, short-term loan. In this case a bank loan or 0% interest credit card may be better.
For many people downsizing can be a much savvier choice. This allows you to free up cash in your home without having to pay a hefty fee or high interest rates. But of course this isn’t an option for everyone – and there are also costs attached to moving.
Equity release is best considered only if you would prefer to stay exactly where you are without the prospect of moving or downsizing in the future. A lifetime mortgage may be more flexible than a home reversion plan in this instance.
Where can I find more information on the pros and cons of equity release?
You’ll find more helpful and impartial advice here. We have a variety of articles covering a wide range of subjects to help you make the most of your money in later life.
Information on specific equity release loan products can be found from the lender themselves. For impartial guidance look at the Equity Release Council and gov.uk websites.
If you are concerned about inheritance tax or have a complex personal financial situation please consider speaking with a specialist financial advisor. They can thoroughly assess your situation and offer tailored guidance.
Equity release schemes reviews can be helpful, but ensure that they are fully impartial and posted on third-party sites as opposed to coming directly from the lender themselves.
Before releasing equity sure to check that any lender you consider is regulated by the FCA (Financial Conduct Authority).
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.