The pros and cons of equity release


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equity release pros and cons

*Updated March 2024*

With the cost of living crisis and the income needed in retirement continuing to rise, equity release could be a great way of boosting your income in later life but it’s a big decision, especially as a lifetime mortgage is usually repaid from the sale of your property.

Ultimately, whether equity release is right for you will depend on your personal circumstances, so always seek professional advice from an independent specialist. In the meantime, if you have any more questions about the disadvantages and benefits of equity release, please don't hesitate to get in touch.

In this guide, our expert Ashley Shepherd, who has over 30 years' financial services experience, takes a close look at the pros and cons of equity release lifetime mortgages to help you weigh up your options.

More information on the topics raised in this article

> Lifetime Mortgages

> Eligibility

> Equity release FAQs

What are the pros and cons of equity release?

Equity release could give you more financial freedom in retirement. The main advantage is that it allows you to unlock some of the value of your home as tax-free cash, without having to sell it or move out.

With flexible payment options and no need to make monthly repayments unless you choose to, it may be an appealing option, but whether it's right for you will depend on your personal circumstances. 

Here's a quick summary of the pros and cons of equity release from my perspective.

Pros of equity release:

  1. You receive a tax free cash sum to use for whatever purpose you like
  2. There are no monthly repayments to make unless you choose to
  3. You own 100% of your property and benefit from any rise in house prices
  4. You'll never owe more than the value of your home
  5. You can stay in your home for life or until you move into long-term care
  6. You can choose to draw smaller amounts of money when you need it and only pay interest on what you release, not the cash in reserve
  7. You have the option to protect a percentage of the value of your home as an inheritance
  8. It could help you reduce your inheritance tax liability
  9. You have the freedom to move as long as your provider approves the property
  10. You have the protection of the FCA’s regulations and the high standards set by the Equity Release Council

Cons of equity release:

  1. Interest rates on lifetime mortgages tend to be higher than standard mortgages
  2. Compound interest means the amount you owe grows quickly unless you take steps to pay off some of the interest in your lifetime
  3. You’ll have less to leave loved ones as an inheritance
  4. Repaying your loan early can incur additional costs
  5. Your eligibility for state benefits could be affected

What are the catches or 'pitfalls' of equity release?

The reality is, releasing equity may be a great way to raise the cash you need, but it will depend on your personal circumstances. That's why it's important to also be aware of any disadvantages.

Here are the potential downsides of equity release as I see them, in more detail:

1. Lifetime mortgage interest rates tend to be higher

A lifetime mortgage works differently to a standard mortgage. With a standard mortgage, you usually make monthly payments over a set period. But with a lifetime mortgage the money you borrow and the total interest are usually only repaid when you die or go into long-term care.

As a result, lifetime mortgage interest rates tend to be higher. In 2024 interest rates are currently between about 5.3% and 6.5% AER, although you might be able to find a lower rate if you look around.

How to get a good deal

Speak to a financial adviser qualified in equity release. They can search the market to find the most appropriate equity release plan for you, and at the best rate. We work in association with Age Partnership, a specialist equity release broker who can compare equity release products from a variety of the UK’s leading providers, many of which offer preferential rates through Age Partnership that you may not find anywhere else.

2. The amount owed can go up quickly

The interest rate on a lifetime mortgage is usually fixed, however, it is 'compound' interest. This means that it is charged on the total amount of the loan each year, including all the interest that has already built up. So every year you're charged interest on a larger and larger sum, which can dramatically increase the total amount owed. Try our equity release compound interest calculator.

The longer your lifetime mortgage lasts, the longer interest charges can continue to build up. In some cases, at the end of the plan, you or your family could end up owing the whole value of your home to the equity release company.

How to lessen the impact of compound interest

Many equity release providers now offer lifetime mortgages with an option to make voluntary repayments – either monthly or on a flexible ad-hoc basis. This can help to lessen the impact of compound interest.

Also, always make sure your provider is a member of the Equity Release Council. Then your lifetime mortgage will include a “no negative equity guarantee”, meaning you will never owe more than the value of your property.

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3. The value of your estate is reduced

When you release equity from your home, you'll receive either a lump sum, regular cash payments or a cash reserve to draw on when needed. In exchange, you agree that the equity release provider will be repaid when you die or move into long-term care. This will probably mean selling your home, so your family will not be able to inherit it – although they will receive any money left over after the sale. Read more about what happens to equity release on death.

How can you ensure you leave an inheritance?

Look for a lifetime mortgage that includes an inheritance protection guarantee. This lets you 'ring-fence' a percentage of your home's value, to ensure it will be passed on to your chosen heirs.

4. Repaying a lifetime mortgage early can be costly

As its name makes clear, a lifetime mortgage is a lifelong commitment. If for some reason you decide to pay off your mortgage early you could be faced with an early repayment charge, which could be high.

How to minimise costly repayment of your lifetime mortgage

Give careful thought to how and when you’d like to repay your lifetime mortgage. If paying back some or all of the loan as you go is important to you, consider a lifetime mortgage with the option to make penalty-free voluntary repayments, either on an ad hoc or regular basis.

5. Your entitlement to state benefits may be affected

If you're receiving a state pension or universal credit, your benefits may be affected when you release equity from your home, as it will increase your income.

On the other hand, your current credit score won't affect your eligibility for equity release – the amount of tax-free cash you can release simply depends on your age and the value of your property.

Who can tell you if equity release would affect your benefits?

Ask the Department of Work and Pensions, or Citizens Advice how releasing equity might affect your state pension or entitlement to benefits. Age Partnership's advisers are also qualified to advise you on this.

Speak to an equity release specialist

Always seek independent financial advice before deciding whether equity release is the right choice for you. It's best to consult an equity release qualified adviser, such as the award-winning equity release specialist Age Partnership.

Age Partnership will compare equity release plans and providers from some of the UK's leading companies, giving you a broader view of the most suitable solutions for your unique circumstances. 

Hopefully I've addressed all your questions about the pros and cons of equity release but if you do have any other questions take a look at our FAQs page or get in touch.

Next steps

To see how much equity you could release from your home, use our free and easy to use calculator.

Or for free advice from an equity release specialist at Age Partnership, call 0800 368 8466.

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