Is Equity Release a Good Idea For You?
Equity release can provide a useful way for older homeowners to access the capital built up in their property. It won’t be suitable for all, but in the right circumstances equity release could be used to supplement your pension income or provide a lump sum, all while you remain living in your home.
Equity release is becoming an increasingly popular option for older homeowners who want to unlock some of their property value but still remain living in their home. Whether you have home renovations in mind, care costs to cover, other debt to repay, or want to boost your retirement income, equity release has the potential to help.
However, it won’t be the right choice for many people, so it is essential that you understand the advantages and disadvantages of equity release schemes from the start.
Pros of equity release
There are many potential advantages of equity release, which might appeal if you have house equity that you want to unlock.
Access equity without selling
Perhaps the biggest selling point of equity release is that you can tap into the value of your home without having to sell it and move somewhere else.
It can be a flexible way to access house equity, as you can use the funds for all sorts of different purposes, such as paying for home renovations.
You will have a choice over the way that you receive that money too. You could release it as a lump sum, for example, if you have one big expense that you want to put the cash towards. Alternatively, you can go for a ‘drawdown’ facility, where the funding is there for you to dip into as and when you need it, perhaps as a means to supplement your pension income.
Help loved ones financially
Equity release might also be a useful way to help your family and friends financially, allowing you to enjoy seeing how they use that money. For example, you might have a child or grandchild who is struggling to purchase their first home. By releasing equity from your own home, you could provide them with the deposit they need to get on the property ladder.
» MORE: Learn about gifted deposits
Monthly repayments aren’t essential
With equity release, you don’t need to worry about making monthly payments either, as the sum borrowed can be repaid through the property’s eventual sale after you die or move into care. This also means you don’t have to prove that you can afford to make monthly payments, as you would with a traditional mortgage.
However, there is flexibility here too, as some lifetime mortgages allow you to make voluntary repayments. If you can make payments each month, it will reduce or maintain the debt that will need to be repaid by the sale of your home. In turn, this could make it more likely there will be money left over to pass on as inheritance.
No negative equity guarantees
The fact that most providers now include ‘no negative equity’ guarantees also cannot be underestimated, as it means that your debt will be cleared in its entirety by the proceeds of the eventual sale of the property. As a result, your loved ones will never have to make payments of their own towards the loan.
» MORE: What is negative equity?
Cons of equity release
On the other hand, there are potential disadvantages to equity release, which you should always consider before deciding whether equity release is the right choice for you. These include:
Higher interest rates
The interest rates charged on equity release products, such as lifetime mortgages, will generally be higher than what you will pay on a traditional mortgage.
This is exacerbated by the fact that most equity release deals don’t involve you making any repayments, so you don’t pay off any of the money borrowed until the time comes to sell the property after your death or a move into long-term care.
With interest on the mortgage rolling up over the years, the longer you live, the more expensive the loan becomes. For this reason, the younger you are when you take out equity release, the more costly it is likely to be.
Impact on state benefit entitlement
Another downside to consider is the potential impact on any state benefits you might receive. Your entitlement to certain benefits is established on a means-tested basis ‒ such as pension credit, for example ‒ and any money you receive via equity release could mean that you no longer qualify.
Will you still leave an inheritance?
Ordinarily, your loved ones might receive the proceeds from the sale of your home after you die as an inheritance. However, with equity release requiring that much of the money raised from the property’s sale ‒ or even all of it ‒ must go towards repaying that loan, there may be little or nothing left to pass on.
How to decide if equity release is right for you
There is much that needs to be considered when deciding whether equity release might suit your personal circumstances. For this reason, you must always get financial advice before proceeding. This might be available through advisers employed by an equity release provider or you might need to appoint your own independent financial adviser.
Whichever route to advice you take, you will have the chance to discuss your circumstances and work out if equity release is your best option. It may be the case that there is an alternative to equity release that is a better fit for you, such as remortgaging or downsizing to a smaller property.
It’s also important to discuss the idea with your loved ones and make them aware of your intentions, particularly as equity release may mean that they do not receive an inheritance, which they were expecting. They, and perhaps you, might also have concerns about how safe equity release is.
Finding a lender that you’re comfortable dealing with and which offers a suitable and competitively priced equity release plan is always essential too.
» COMPARE: Lifetime mortgages
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more