Equity release can be a good idea for anyone looking to give themselves an injection of cash from age 55 onwards. But is it right for you and your personal financial circumstances? Here’s a quick guide to the pros and cons of equity release.
The pros of equity release:
It’s flexible (and tax-free too)
You can choose to receive the funds you generate from equity release as a lump sum or in instalments over a period of time. That gives you the freedom to take more control of your financial affairs – and whichever option you choose, the payment you receive is tax free.
Your money, your way
How you spend the money generated from your equity release is up to you. Spruce up your kitchen, jet off on the holiday of a lifetime or boost your pension pot for retirement. It’s up to you.
No monthly repayments
Unlike other forms of borrowing, there are no monthly repayments to make with equity release. In fact, repayment isn’t due until you move to a different property, move into a long-term care facility or on the death of the last surviving borrower living in the property. At this point your lender will sell your property and deduct their share from the proceeds.
You won’t end up owing anything more than the value of your property
Any lender that is a member of the Equity Release Council will provide you with something called a no negative equity guarantee. This means that if something unexpected happens and your property is sold for less than the amount that you owe, your estate won’t have 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 don’t have to leave your house
When trying to generate cash, many people downsize their property as they approach retirement. But if your house is more of a home, you may be very reluctant to leave. Equity release allows you to raise funds without having to break the sentimental connection you have with your property.
Potentially avoid inheritance tax
Gifting wealth to your nearest and dearest can incur some hefty tax charges. But when you release cash against the value of your home, you can provide a lump sum to family or friends without an immediate tax liability and potentially no further tax liability depending on the circumstances.
The cons of equity release:
You may not be able to borrow as much as you wish
Equity release schemes are for homeowners aged over the age of 55. The amount you can borrow depends on several factors including the value of your home as well as your age and your health – and the younger and healthier you are, the amount you can borrow will be lower.
You may need to pay for a valuation
Your application for equity release will necessitate a formal valuation of your property and in some cases it will need to be paid for by you.
You must pay off your existing mortgage first
If you haven’t yet cleared the balance on your mortgage, you may want to think twice about equity release. The funds you generate must be used to pay off your mortgage in full before you can access any cash.
The interest on your borrowing can accumulate fast
With equity release, the interest that you owe grows – or compounds – over time. The longer you borrow, the more you will have to repay. If you are not careful you could find yourself owing as much interest as the original amount of equity released, leaving you to repay double the amount that you borrowed. Thankfully there are equity release lenders that allow you to make ad hoc payments during your lifetime to offset the interest and maintain a level balance.
Early repayment charges
Attempting to repay your borrowing early may incur charges – as much as 25% of the value of your initial borrowing. However, there are some lenders that provide you with the option to repay up to 15% of the value of your original borrowing each year without fees or others that waive these fees after 10 years or if you are simply downsizing.
Moving house can be hard
Moving house is never easy. But it can be even harder once you have arranged an equity release plan. ‘Transferring’ your plan to another property in essence requires you to repay one plan, and then take out another. However, some lenders are happy that you transfer your existing loan to your next home, subject to their suitability checks.
Once you make equity release arrangements, you will no longer be able to take out additional loans against the value of your property. Equity release is a long-term – indeed lifetime – commitment.
It may impact your benefits entitlement
An equity release plan could impact your entitlement to means-tested state benefits. That includes pension and savings credit, council tax reduction, income support, jobseekers’ allowance and more.
Less to pass on to your nearest and dearest
It can be reassuring to know that you can provide something for your nearest and dearest after you have gone. But with equity release you forfeit your property once the last remaining borrower dies or moves into care. Your estate receives the proceeds from the sale of your property, of course. But only once your debt to your lender has been repaid as well as the accumulated interest. That could leave you in a position where you are leaving less to your loved ones than you would have liked. However, some lenders offer inheritance guarantees, which allows you to specify a portion of your home’s future value to be secured as an inheritance to your beneficiaries, as long as the maximum loan available is not taken.
There’s no right or wrong answer
The equity release market has expanded significantly over the last decade. There are dozens of options available for you to choose from – and it’s important to make the right choices. That depends on your particular financial circumstances and ambitions, because what makes good financial sense for one person isn’t likely to do so for you.
For that reason, it’s always best to seek the opinion of an independent financial adviser. And as independent members of the Equity Release Council that specialise in wealth management, we are uniquely positioned to talk you through your options and help you make your equity release decisions with confidence.
You can find out more about our equity release advice service on this page. Or get in touch for an informal conversation about arranging a telephone consultation or a face-to-face meeting at one of our offices in London or the West Country.