Equity release can be a good move or bad one depending on your circumstances and it is very important to consider the pros and cons of equity release before committing to it.
You should also look for alternatives to equity release.
What is equity release?
Equity release is when you release the equity in your home for a large lump sum, a regular income or a mixture of both. You can continue living in your home till you die or have to move into a care home and the capital plus interest is repaid by selling the house one you have moved out or died.
This means you don’t have to make any regular repayments. Equity release is usually only available to those over 55 years.
There are two main types of equity release and both have their pros and cons.
Types of equity release
Pros of equity release
- Equity release allows you to extract income from your property and live for the rest of your life without having to work or think about generating any income
- With an equity release scheme, the property is still legally yours.
- Your family could buy out the equity release provider if they want to move into your home or benefit from any future rise in property value.
- Some equity release products such as the life time mortgage will allow you to switch between providers if you have found a better rate.
- Most equity providers are members of the equity release council. This means that they have agreed that their clients will never have negative equity. This means the interest you owe can never be more than the value of your home. This is known as the “no negative equity guarantee”.
- You may be able to move home with the home reversion equity release product but your home reversion provider will have to agree to this.
- Some lifetime mortgages allow you to make ad hoc capital and interest repayments with no early repayment fees.
- Equity release can be a tax-efficient way to withdraw money but this is based on the way you withdraw it (you should seek independent financial advice for this).
- You will also only pay interest on the amount you withdraw. This means you can manage the interest you owe by only withdrawing money when you need it.
- The money you take out of your equity release can be used however you like as it is your money.
- You can also take money however and whenever you like which gives you great flexibility.
- Equity release allows you to live in your home till you die or are moved into care.
- By using equity release your monthly expenses won’t increase as you have nothing to pay back.
Cons of equity release
- Some equity providers do not offer a “no negative equity guarantee”: which prevents you from owing more in interest to the equity release provider in relation to how much your property is worth. This is one of the cons of equity release.
- You may leave nothing behind for your family when you use an equity release scheme. This is because the interest you owe may be as much as the value of your home.
- You may need to be above 60 years before you will be considered for an equity release scheme.
- You will be expected to keep your home up to good standing and this means the standard of the equity release provider.
- If you have negative equity at the end of your equity release, your family will have to pay this debt if you have passed on.
The maximum you can borrow with most equity release products is usually 30% on home reversion plans and 60% on lifetime mortgages. This may not be sufficient enough for you to live off.
- The interest rates charged by equity release providers may be high as there isn’t much competition in the market.
- Using equity release means a potential con of equity release could be the loss in any rise in property value as you have to share this with the equity release provider.
- Your benefits may be affected when releasing the cash from your home will increase your income or savings and that, in turn, may affect your entitlement to state benefits
- You may have to pay up to a 5% fee to release equity in your home and there may be advice fees too.
- If your family or yourself want to get out of the equity release then the early repayment costs could be significant although most providers don’t impose any penalty if you redeem the equity release within the first 5 years.
- Because of the effect of compound interest, the amount you owe could rise significantly.
- Equity release could affect the benefits you receive and you should consider this on a case by case basis.
- You should also weigh whether you’ll be entitled to aged-care support. And, if not, how equity release could factor into your care plans.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.