Pros and cons of equity release

 

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equity release pros and cons

Equity release could be a great way of boosting your income but it’s a big decision, especially  as a lifetime mortgage is usually repaid from the sale of your property. That’s why it’s important to understand all the pros and cons of equity release before going any further.

Ultimately, whether equity release is right for you will depend on your personal circumstances, so always seek professional advice from an independent specialist.

In this guide we outline the potential disadvantages of equity release lifetime mortgages alongside the many benefits to help you weigh up your options. 

10 benefits of equity release

  1. You receive 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 will 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

What’s the catch with equity release?

The catch with equity release used to be that you could owe more than the value of your home, however times have changed. Now tightly governed by the Financial Conduct Authority, equity release is thought to be one of the most highly regulated financial services available.

In addition to the controls of the FCA, reputable providers are also members of the Equity Release Council, so you are protected by their rules and safeguards, including the ‘no negative equity guarantee’

The reality is releasing equity may be a great way to raise the cash you need, but it will depend on your personal circumstances. It is therefore important to be aware of any potential disadvantages in addition to the benefits.

5 potential disadvantages of equity release

Here are five potential ‘catches’ for you to consider alongside the benefits that come with releasing equity from your home.

Equity release catch 1:

Lifetime mortgage interest rates tend to be higher

A lifetime mortgage works differently to standard mortgages. 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 2020 rates were typically between 4-6% AER, although you might be able to find a lower rate if you look around.

What are your options?

Speak to an independent adviser. They can search the whole market to find the most appropriate equity release plan for you, at the best rate. Our chosen independent experts Age Partnership have negotiated preferential rates with leading lenders you may not find anywhere else.

Equity release catch 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 are charged interest on a larger and larger sum, which can dramatically increase the total amount owed.

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

What are your options?

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 can never owe more than the value of your property.

Equity release catch 3:

The value of your estate is reduced

When you release equity from your home, you will receive 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

What are your options?

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

Equity release catch 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.

What are your options?

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.

Equity release catch 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.

What are your options?

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

Speak to an independent expert

It’s important to seek professional advice before deciding whether equity release is right for you. It's best to consult an equity release qualified IFA or an independent broker, such as award-winning equity release specialists Age Partnership, our carefully chosen partner.

Age Partnership will compare equity release plans and providers from across the market, giving you a much broader view of the best and most suitable solutions for your unique circumstances. 

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 independent equity release specialist Age Partnership, call 0800 133 7380.

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