Is Equity Release Right for You? Know the Pros and Cons
Equity release is a type of loan that allows older borrowers to access some of the money tied up in their property. It can supplement pension savings, aid home renovations, and more. If you’re considering it, make sure you know the potential risks.
Equity release is becoming an increasingly popular option for homeowners who want to unlock some of their property value but still live in it. But it’s important to be clear about the potential advantages and disadvantages of equity release schemes before you sign up for one.
Pros of equity release
Equity release can have its advantages.
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, from topping up your existing pension savings to paying for home renovations.
You 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 a single 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, making it perhaps more appropriate if you want to use that money to supplement your pension income.
» MORE: What is house equity?
Offer inheritances early
Equity release is also a useful way to provide your loved ones with their inheritance early and allows 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, you can give them the money they would inherit before you pass away, helping them get onto the ladder earlier.
Avoid monthly repayments
Equity release borrowers don’t need to worry about making monthly payments either, as the sum borrowed is repaid through the property’s eventual sale. As a result, you don’t need to prove that you can afford a monthly payment.
However, there is flexibility here too, because if you can afford to make payments each month, it will reduce the eventual size of your debt, meaning you can pass on a greater inheritance to your loved ones.
Avoid negative equity
The fact that most lenders now employ ‘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.
Cons of equity release
There are some clear disadvantages to equity release though.
Risks of high interest rates
For example, while interest rates have fallen in recent years ‒ to new record lows in fact ‒ the rates charged on lifetime mortgages remain more expensive 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 you die or move into 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 the loan, the more costly it is likely to be.
» MORE: What is negative equity?
Effects on benefits
Another downside to consider is the potential impact on benefits. Your entitlement to certain benefits is established on a means-tested basis ‒ like pension credit, for example ‒ and an equity release deal can mean that you no longer qualify.
Providing no inheritance
There can also be an impact on your loved ones from opting for an equity release deal. Ordinarily, your loved ones might receive the proceeds from the sale of your home after you die as an inheritance. However, equity release loans mean that much of the money raised from the property’s sale ‒ or even all of it ‒ goes towards repaying that loan, which can result in there being little left to hand onto your loved ones.
How to decide if equity release is right for you
Generally, equity release providers only offer their products through independent advisers. These advisers will discuss your circumstances with you and help you work out if equity release is your best option or if you might be better off going for a simple remortgage or downsizing to a smaller property.
» MORE: Do I need a mortgage adviser?
It’s also important to discuss the idea with your loved ones. An equity release plan may mean that they do not receive an inheritance which they may have been planning on to support their own finances.
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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