The Pros and Cons of Equity Release

If you're sat on the fence, over 55, wondering about the pros and cons of equity release, you've come to the right place. Many people are seeking to take advantage of their available equity. To some, equity release has a bad reputation, and it's important to consider all the details.   

In this insight, we will cover all you need to know about the pros and cons of equity release, from comparing schemes to understanding the tax consequences.

Key Takeaways

• There are many pros and cons to equity release, whether it is right for you will depend on your circumstances.
• A 'no negative equity guarantee' prevents debt from being passed on to family other than what can be paid from the house.
• Equity release is regulated by the FCA and the Equity Release Council help to maintain standards in the industry.
• There are different types of Equity Release, lifetime mortgages & home reversion plans. It's a good idea to seek advice to understand what is right for you.

How Does Equity Release Work?

Unlike taking out a new mortgage or selling your property, equity release allows you to tap into the value of your home without the need for additional monthly repayments. It offers the freedom to access funds either through a lump sum payment or as a steady income, depending on the equity release program you choose.

Here's how it works: a lender provides you with funds based on a percentage of your home's worth. You retain ownership of your property, and the repayment of the released equity, along with the accrued interest, is settled when the house is eventually sold—usually upon your passing.

Rest assured, equity release is a regulated financial product overseen by the Financial Conduct Authority (FCA). Additionally, the Equity Release Council has introduced codes of conduct that enhance the flexibility and safety of equity release products. These standards of advice have not only improved the reputation of equity release but also ensure a safer and more reliable experience for homeowners like you.

The Pros and Cons of Equity Release

To help you come to the conclusion of whether equity release is the best outcome for you, here are the pros and cons you need to consider.

Pros

You Get To Keep Your Home and Get Money

Imagine you've been living in your cozy home for years, and you love it there. But you also need some extra money to cover your expenses or fulfill your dreams. With equity release, you don't have to worry about leaving your home behind or selling it. Instead, you can get the money you need while still owning and managing your property. It's like having your cake and eating it too – you keep your beloved home and have cash in hand.

Get Money Regularly

Let's say you've retired, and your pension or savings aren't enough to cover all your monthly bills. Equity release can help you by providing a regular income, you can use the moeny you raise from equity release to buy an annuity, this will provide a further income in retirement.

Cash Available for Important Stuff

Life can be unpredictable, and unexpected expenses can pop up, like a leaky roof, a medical emergency, or a family celebration. With equity release, you have the funds to handle these situations without stress. For instance, if your home needs repairs, you can use the cash to fix it up and ensure your living space remains comfortable and safe. You can also use the money to pay for medical treatments or even take that dream vacation you've always wanted.

No Tax Worries

Taxes can be confusing and frustrating, but with equity release, you don't need to worry about it. The money you get from equity release is considered your own, and it's not like a taxable income or a bonus, so you don't have to pay any extra taxes on it. That means more money in your pocket to enjoy without any surprise tax bills.

No Monthly Payments

You know how you have to make monthly payments for things like credit cards or loans? Well, equity release is different. You don't have to worry about setting aside money every month to pay back the loan. Instead, you only need to pay back the money when you decide to sell your home in the future. It's like having some extra savings, but you can use them right now to improve your life.

Say Goodbye to Mortgage

Paying a mortgage every month can eat up a big chunk of your income, leaving you with less money for other things. With equity release, you can use the money you get to pay off your mortgage, and poof! No more monthly mortgage payments. This can give you a huge financial relief and more freedom to enjoy life without that burden.

Clear Your Debts

If you have other debts, like credit card balances or personal loans, they might be causing you stress and eating into your budget. With equity release, you can use the money to clear these debts all at once. It's like starting with a clean slate and simplifying your finances. You can focus on managing your money better and using it for things that truly matter to you.

Enjoy Retirement More

Imagine having the financial freedom to enjoy your retirement to the fullest. With the extra money from equity release, you can make your retirement years truly special. You can pursue hobbies, take classes, support your loved ones, or even move to a new place you've always dreamed of. The money is there to help you have a better and more fulfilling retirement journey.

Cons

While equity release can give you much-needed money, there are a number of possible disadvantages to take into account before choosing if equity release is the correct option for you.

Potential Loss of Control Over Your Home

One potential drawback of equity release is that you might lose some control over your home. In many equity release programs, the lender becomes a co-owner of your property, giving them a say in its future. They may have the authority to make decisions about maintenance, upgrades, and even the ultimate sale of the property.

Let's say you decide to go for equity release and access some of the money tied up in your home. The lender now has a share in your property, and if they believe it needs significant repairs, they might insist on using a portion of the released funds for those repairs. This could limit your choices and decisions about your home.

Potential Impact on Inheritance

Another downside of equity release is that it can reduce the inheritance you leave for your loved ones. When you borrow money through equity release, the loan must be paid back when the property is sold, which often happens when you pass away. As a result, the amount your beneficiaries receive from the sale might be less due to the outstanding loan.

Suppose you have children or grandchildren who were expecting to inherit your home and its full value. However, if you've taken out an equity release loan and the property is sold after your passing, the loan amount will be deducted from the sale proceeds, leaving less money for your loved ones.

Financial Risks Involved

Equity release carries some financial risks that you and your family should be aware of. One potential risk is the possibility of owing more on the loan than the property's worth, especially if the property's value decreases over time.

Let's say you took out an equity release loan when the property market was doing well, and the value of your home was high. However, a few years later, the housing market experiences a downturn, and your property's value decreases significantly. If you now owe more on the loan than the property's current value, it could lead to a situation called "negative equity," leaving you and your heirs in a tough financial spot.

Comparatively Higher Interest Costs

When you look at the overall interest paid, equity release may not be the most cost-effective borrowing option available.

Consider you have some savings, and you're considering either using those savings or opting for equity release to cover your expenses. If you use your savings, you won't have to pay interest on them, whereas equity release will involve paying interest on the loan amount you borrowed. In the long run, the interest payments could make equity release more expensive compared to using your own savings or other borrowing methods with lower interest rates.

What Are Your Equity Release Options?

In the UK, lifetime mortgages and home reversion plans are the two primary categories of equity release.

Lifetime Mortgages

With lifetime mortgages, property owners can discharge a tax-free lump payment or recurring income from the equity in their house while keeping ownership and the right to occupy it. These products often have fixed or variable interest rates and can be paid back upon the sale of the home or the demise of the homeowner.

Home reversion plans

On the other hand, home reversion plans entail the homeowner selling a piece of their property to a lender in exchange for a lump amount or ongoing income. Until they pass away or enter long-term care, the homeowner has the right to live in the house. After that, the lender will become the legal owner of the house's remaining assets.

Some equity release packages could come with extra features, such as the choice to incorporate a no-negative equity guarantee or the opportunity to make partial repayments. Before making a choice, homeowners should carefully study the terms and circumstances of these goods.

Seeking Advice On The Pros and Cons Of Equity Release

Before deciding how to proceed with equity release, you should seek advice and consider the alternatives to equity release. Equity release advisers can assist with explaining equity release in a way that makes sense to you. They wil explain all the options around fees, and you can decide how to proceed.

If you are unsure how to proceed with equity release advice, you can complete the Sunny Fact Find. Your answers help Sunny Avenue to find you the best-suited adviser. Your adviser then contacts you for a no-obligation conversation on how they can help. You decide how to proceed.