Pros and cons of equity release

If you’re looking to raise funds in later life, you could release some of the equity in your home.

But is it a good idea? Here’s a look at the pros and cons of equity release.

If you’re looking to raise funds in later life, you could release some of the equity in your home.

But is it a good idea? Here’s a look at the pros and cons of equity release.

Mark Gordon
From the Mortgages team
9
minute read
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Posted 13 JULY 2021

What does equity release mean?

Equity is the total market value of your home minus any mortgage left to pay. In other words, it’s the amount you’d walk away with if you sold your house.

For example, if your home is worth £500,000 and you still have £200,000 of mortgage left to pay, your equity would be £300,000.

Equity release is a way for you to access some of the value of your home, without having to sell up and move. It’s particularly useful in later life as the money can provide you with additional income once you’re retired or be put towards unexpected costs like care home fees.

How does equity release work?

If you’ve paid off most or all of your mortgage, equity release can provide you with a tax-free lump sum of money or an income, in exchange for part of the value of your home.

You can do this by using a special mortgage or by selling a portion of your home on the condition that you can live there for as long as you want.

There are two types of equity release to consider:

A lifetime mortgage

This is the most popular form of equity release. You borrow a lump sum of money that’s paid back when your home is sold after you die or move into long-term care accommodation.

There are two main types of lifetime mortgage:

  • Lump sum – you release a single, tax-free lump sum with no monthly repayments, but interest will be added that’s rolled-up over time. The interest will be repaid together with the original loan amount when your home is sold.
  • Drawdown – lets you withdraw a smaller amount initially, then you can draw down further amounts in the future. You only pay interest on the amount you take out each time, so it can work out much cheaper than a lump sum lifetime mortgage.

There are various flexible features available with both types of lifetime mortgage. For example, you could pay off part or all of the interest monthly over your lifetime. If you choose to do this, any payments you make are completely optional and can be stopped at any time.

A home reversion scheme

You sell all or a portion of your property, but you have the legal right to continue living there until you die or move into long-term care. You can choose to receive the money as a tax-free lump sum or regular monthly income, whichever you prefer.

You can typically sell between 25% to 100% of your property. Just be aware that you won’t receive the full market value for it – something to bear in mind before making a decision.

When your home is sold, the reversion provider gets their share of proceeds. If you sold them the entire property, they will get all of the proceeds from the sale.

How much equity could I release?

The amount you could release depends on a number of factors, including:

  • your age
  • how much your property is worth
  • the location of the property
  • the type of property
  • any outstanding mortgage left on the property.

Typically, the older you are, the more you’ll be able to release.

It can also depend on the type of equity release:

  • with a lifetime mortgage, you can normally borrow between 25% to 30% at age 65. If you’re older, you could borrow up to 50%.
  • with a home reversion you can usually sell between 25% and 100% of your property, but the amount you’ll get might only be 20% to 60% of its market value.

Use our equity release calculator to get an idea of how much equity you might be able to release.

What are the benefits of equity release?

The obvious benefit of equity release is that you’ll have money to spend straight away, rather than keep it tied up in your home. It could be particularly beneficial if your property has significantly increased in value over the years.

What are the pitfalls of equity release?

In the case of home reversion, you won’t get the full market value of your home – so you’ll get less than you would from selling it on the open market.

With a lifetime mortgage, the added interest means that when it’s time to sell, you’ll end up owing more than you borrowed - although there are options to control the impact of the interest.

What are the pros and cons of a lifetime mortgage?

Pros:

  • The equity released is tax-free.
  • You can choose to release an initial lump sum, then smaller amounts in the future, or opt for a regular monthly income.
  • Use the money from equity release in any way you wish – help your child buy their first home or top up your income in retirement, it’s up to you.
  • Unless you choose to pay off some of the interest or part of the loan, there’s nothing to repay until you die or move into long-term care.
  • You get to stay in your own home and won’t have to face the hassle and expense of moving.
  • You could benefit if the property goes up in value.
  • Most mortgage providers offer a no-negative-equity guarantee – you’ll never repay more than the value of your home when it’s sold, even if it’s less than the amount you owe.
  • Your beneficiaries might still receive some inheritance once the property’s sold and the debt’s paid off.
  • It might reduce your Inheritance Tax liability.

Cons:

  • Your beneficiaries are likely to receive a much lower inheritance.
  • Interest can quickly build up – this could be a significant amount if you choose a lump sum lifetime mortgage and don’t make any payments.
  • There may be an Early Repayment Charge if you decide to pay off the loan early.
  • You might need to pay arrangement, valuation and legal fees.
  • You will have to take out buildings insurance as part of the mortgage agreement.
  • Interest rates for a lifetime mortgage are typically higher than those for a standard mortgage.
  • Equity release could affect any means-tested benefits or local authority support you may otherwise be entitled to.
  • You may need to ask the provider’s permission if you want someone else, like a relative, new partner or carer, to move in with you.
  • If you decide to move, your provider might not let you port your mortgage (transfer it over) if your new property doesn’t meet their criteria. For example, they might not accept a thatched roof property or sheltered housing.
  • You might have to pay off some of the loan if you want to downsize to a cheaper property.

What are the pros and cons of a home reversion plan?

Pros:

  • You’ll receive a tax-free lump sum or income.
  • Choose between a lump sum, a regular income or a mixture of both.
  • You have the legal right to stay in your home until you die or move to a long-term care home.
  • You won’t have to face the costs or upheaval of moving home.
  • An equity release scheme could reduce your Inheritance Tax liabilities.
  • You can choose to only sell a share of your home, leaving the rest as an inheritance for your beneficiaries.
  • The older you are, the higher the percentage of your home’s market value you’ll get.

Cons:

  • It’s a very costly way to release equity and can be far more expensive than a lifetime mortgage.
  • Your beneficiaries will receive a much lower inheritance, or nothing at all if you sell 100% of the property.
  • You’ll no longer be the sole owner of your home.
  • You’ll receive a lot less than the full market value of your property.
  • If you decide to end the plan early, you’ll need to buy back the share you sold at full market value, which could be much more than you originally sold it for.
  • A home reversion plan could be of little value if you die shortly after taking one out – although your beneficiaries might be entitled to a rebate if you die in the first few years.
  • If you decide to move, you might not be allowed to transfer the home reversion plan to your new home.
  • You may need the provider’s permission for someone else, like a new partner, relative or carer, to move in.
  • You’ll be expected to keep the property in good condition and pay for maintenance and repairs yourself.
  • You might be charged arrangement, valuation and legal fees.
  • You might have to take out buildings insurance as part of the agreement.
  • It could affect any means-tested benefits you’re entitled to.
  • If housing prices rise significantly, it will be the reversion provider that benefits, not you.

Frequently asked questions

What protection is there for equity release?

Equity release schemes are regulated by the Financial Conduct Authority (FCA). The Equity Release Council was also set up as added protection for people on equity release plans. Equity release providers and advisers who are registered with the ERC must agree to abide by its rules and sign up to the Statement of Principles. They must ensure that you can live in your home until you die or move to a care home, and that you’ll never owe them more than your home is worth, even if its value drops.

How much does it cost to set up equity release?

You should expect to pay the same types of costs and fees as you would for setting up a standard mortgage. These can include:

  • arrangement fees
  • valuation fees
  • legal fees
  • an Early Repayment Charge (if you have an existing mortgage to clear before releasing equity)
  • buildings insurance.

You should factor these in when working out how much an equity release plan will cost you.

What age do I have to be for equity release?

The minimum age for a lifetime mortgage is 55.

You can usually set up a home reversion plan over the age of 65. However, the older you are, the more percentage of your property you can buy, so it’s better suited for people over 70.

Is equity release right for me?

Releasing equity in your property is not a decision to be taken lightly and you should think very carefully before going ahead. Whether it’s the right option for you depends very much on your circumstances.

What to consider:

  • Do you have any other savings or investments that could meet your needs during retirement?
  • Do you want to stay in your own home, or would you consider downsizing to a smaller, cheaper property?
  • Do you have family who won’t be unduly affected by a smaller inheritance, or no beneficiaries at all?
  • Have you spoken to an equity release adviser about whether equity release is right for you?
  • Have you looked at alternatives to equity release?

What are the alternatives to equity release?

If you don’t think equity release is right for you, you might want to consider one of the following options:

  • Selling your home and downsizing to a smaller, cheaper property.
  • Taking in a lodger to help top up your income.
  • Returning to work if it’s feasible.
  • Taking out a home improvement loan to fund renovations or an extension to help increase the value of your property.
  • Remortgaging your property and switching to a better deal.

Where can I get equity release advice?

An equity release adviser can advise you on whether it’s a good idea to go ahead with equity release or if another option would be better for your circumstances. Equity release is a huge decision and can have life-long consequences, so make sure you get advice from a qualified expert.

Our partners Responsible Equity Release have fully trained equity release specialists, and are FCA-registered and members of the Equity Release Council. They can advise you on all aspects of equity release to help you make an informed decision and find a tailored solution that works for you.

Compare the Market has partnered with Responsible Equity Release to offer lifetime mortgages approved by the Equity Release Council.

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