August 17th, 2020
A guide to the pros and cons of equity release
The pros and cons of equity release can be surprisingly numerous, leaving you with a headache when you are trying to work out what’s best for you. Let’s take a closer look and try to get to the bottom of what’s applicable to your personal financial goals.
The pros of equity release
Spend your money on anything
You can spend the money you generate from equity release in any way you wish. Home renovations, a family holiday somewhere special or a boost to your pension pot. There are no restrictions. Your call.
Payment is flexible (and tax free)
You can choose whether you take equity release funds as a lump sum or in instalments. That gives you freedom of your finances. And whichever option you go for, the money you receive is tax free.
No monthly repayments
Unlike other forms of borrowing, there are no monthly repayments with equity release. In fact repayment isn’t due until one of the following:
- You move to a different property
- You move into a long-term care facility
- The last surviving borrower living in the property passes away
When one of these triggers is met, your lender will sell your property and deduct their share from the proceeds.
You will never owe more than the value of your property
Say hello to the ‘no negative equity guarantee’ – something that any lender affiliated with the Equity Release Council will provide you with. It means that if something unexpected happens and your property is sold for less than the amount that you owe to your lender, you (or your estate) won’t be liable to make up the shortfall. The lender absorbs the risk – so long as they are a member of the Equity Release Council at the point you arrange your borrowing.
You get to stay in your house
The traditional way to free up money that’s tied up in bricks and mortar is to sell up and buy somewhere of lesser value. But sometimes the place you live is more than a house. It’s a home with cherished family memories. And that can make it very hard to leave. Equity release gives you an alternative – allowing you to free up significant cash without saying goodbye to your home.
You may be able to avoid inheritance tax
After you’ve gone, your nearest and dearest can incur significant tax charges on anything you’ve left behind for them. But when you release cash against the value of your home, you can provide a lump sum to loved ones before you pass away – without an immediate tax liability for anyone, and potentially no further tax liability depending on the circumstances.
The cons of equity release
There are limitations
Equity release schemes are only available to homeowners aged over 55. The amount you can borrow depends on several factors – such as the value of your property as well as your age and your health. The younger and healthier you are, the less you will be able to borrow.
Once you make equity release arrangements, you won’t be able to take out any further loans against the value of your property.
You may need to pay for a property valuation
Your application for equity release will involve a formal valuation of your property. There aren’t many lenders who will pay for this, which means you will have to foot the bill.
You must pay off your existing mortgage first
Before you can spend anything, the funds you generate from equity release must be used to clear the full balance on any current mortgage you hold for the property. That can leave you needing to apply for a far larger release of equity than you may have anticipated.
The interest on your borrowing can accumulate fast
With equity release, the interest that you owe grows – or compounds – over time. In short: you pay interest on the interest you owe. So the longer you borrow, the more your lender will take from the eventual sale of your property. If you live a long and healthy life, you could end up paying your lender far more than the amount you originally borrowed.
However, the market is changing. Some equity release lenders now allow you to make ad hoc payments during your lifetime to offset the interest on your borrowing and maintain a level balance – in which case the amount your lender takes from the sale of your home will be the same as the amount you borrowed. You can even find some lenders who will allow you to begin repaying the money you owe before the sale of your house is triggered.
The rules here can get a little complicated. So talk to us if you would like to know more.
Moving house becomes even harder
There are always some tricky hoops to jump through when you are moving house. But it tends to become even harder once you have arranged an equity release plan. ‘Transferring’ your plan to another property usually requires you to repay one plan, and then take out another. However there are some lenders that will permit you to transfer your existing loan to a new property, subject to checks.
It may impact your benefits entitlement
Depending on how much you borrow, an equity release plan could mean forfeiting your entitlement to means-tested state benefits – including your state pension.
Less to pass on to your nearest and dearest
The traditional way equity release works is for you to forfeit your property once the last remaining borrower dies or moves into care. Your estate only receives proceeds from the sale of your property once your debt to your lender has taken their share to cover the amount you borrowed as well as interest. That could leave you in a situation where you are passing on less to your loved ones than you may have hoped.
There are however ‘inheritance guarantees’ offered by some lenders. These allow you to ringfence a portion of your home’s future value to be secured as an inheritance to your beneficiaries.
Talk to us if you would like to know more.
There’s no right or wrong answer – it’s all about you
We hope we have helped to flesh out the pros and cons of equity release. But of course there really is no right or wrong answer. Like all big financial decisions, everything depends on your personal financial circumstances as well as your ambitions for your financial future. That’s why it’s always best to talk through your options with a suitably qualified independent financial adviser – like us!
The equity release market has expanded significantly over the last decade. There are dozens of options to choose from. But we can help you make those decisions with clarity and confidence. It only takes a minute to get the conversation started.