What Are the Pros and Cons of Equity Release in 2024?

Discover the Pros and Cons of Equity Release. Is It the Best Way for You to Unlock Equity in the UK? Weigh Up Your Options…
  • Last Updated: 07 Feb 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui

Key Takeaways

  • Equity release offers tax-free cash during retirement, providing homeowners with financial flexibility to cover various expenses.
  • Homeowners have the advantage of accessing these funds without the need to sell their property, and they can also make future housing decisions with ease.
  • While some equity release products safeguard a portion of the property's value for inheritance, the overall amount left for heirs may be diminished.
  • Not everyone qualifies for equity release; there are age and property value criteria, and releasing equity can potentially impact certain state benefits.
  • One of the significant financial considerations is the potentially higher compounded interest rates of equity release compared to traditional mortgages, which can affect the remaining equity in the home.

Equity release pros and cons must be carefully considered before deciding if it’s the best financial option for you.

It can provide financial security for older borrowers, which can fund anything from home improvements to the trip of a lifetime.

However, high fees and interest rates will reduce the amount of inheritance passed down to beneficiaries.

What’s the truth?

In This Article, You Will Discover:

    Every Investor’s team of experienced professionals is committed to delivering accurate, in-depth, and up-to-date content. 

    We understand the importance of financial security and strive to equip homeowners with knowledge to confidently and easily navigate the process.

    What are the good and the bad you must consider? 

    Find out here.

    What Is An Equity Release Mortgage?

    Equity release, for individuals 55 years and older, offers a means to utilize the built-up equity in their homes, including through releasing equity via a mortgage.

    This financial tool is an excellent way for homeowners to fund renovations or adapt their homes to suit changing mobility needs.

    Two main equity release options exist: lifetime mortgages and home reversion plans.

    In a lifetime mortgage, the most common form of releasing equity, you borrow against your home, repaying the loan and interest from the eventual sale of the property.

    Home reversion plans involve selling a part of your property in exchange for a lump sum or regular income, while still residing in your home.

    What Are the Benefits of Equity Release?

    The benefits include access to tax-free cash, not needing to sell your home, inheritance protection, future housing options, no monthly repayments, and flexibility in how you use the money. 

    Let’s have a look at each of these pros and cons of equity release schemes in more detail. 

    Access to Cash

    Equity release is one way of accessing tax-free cash in your retirement.

    This can be particularly useful for those who don’t have significant savings or pensions to fall back on, and who may need additional funds to cover the cost of living or care expenses.

    No Need to Move

    With equity release, there’s no need to sell up and move to access funds. You can remain in your home until you die or go into long-term care.

    This can be a significant advantage for those attached to their homes and communities and who don’t want to uproot themselves later in life.

    Tax-Free Money

    Because it’s classified as a loan, the cash received through equity release is tax-free.

    How the funds are used could potentially be subject to taxation.

    Inheritance Protection

    Nowadays, many equity release products include inheritance protection, so you can ringfence part of your property’s equity, specifically to pass on to your family.

    In addition, it's considered a debt and therefore reduces the value of your estate.

    This means your heirs won’t have to pay inheritance tax if the loan has dropped the value of your estate under £325,000.1

    Future Housing Options

    Equity release can also give homeowners greater flexibility regarding future housing options. 

    For example, you can use the funds released to make home improvements that will enable you to live more comfortably in your later years.

    Provided it meets the lender’s criteria, you can port your plan to a new property if you wish to downsize to a smaller, more manageable home.  

    No Monthly Repayments

    With equity release, you don’t need to make monthly repayments because the loan is only repaid when the plan ends.

    The plan usually ends when the borrower dies or moves into long-term care.

    Flexibility in Using the Money

    There are no restrictions on what you can use your released equity for - unless, of course, it’s something illegal.

    Some popular uses for equity release funds include:

    • Paying off debts
    • Home improvements
    • Going on a dream holiday
    • Paying for education
    • Helping your children onto the property ladder
    • Buying a second property

    What Are the Disadvantages of Equity Release?

    There are, of course, disadvantages to equity release to consider, such as reducing the inheritance left for loved ones, diminishing the homeowner's equity in their property, strict eligibility criteria, the potential impact on state benefits, the need for a property valuation, potentially high-interest rates, and early repayment charges. 

    Here’s a more detailed insight into each of these downsides. 

    Reduced Inheritance

    Because you’ve essentially converted a chunk of your home’s value into cash to use in your lifetime, your heirs’ inheritance will be reduced.

    They’ll receive whatever’s left over from the sale of the house after your equity release mortgage and the compounded interest is paid back.

    Reduced Equity

    By allowing you to tap into a part of your property's worth via a lifetime mortgage or a home reversion plan, equity release diminishes your overall equity.

    As you receive funds from the provider, your remaining equity in the home decreases due to accrued interest or the sale of a portion of your property. 

    It's crucial to weigh the long-term implications on your property's remaining equity and seek professional financial advice to make an informed decision.

    Limited Eligibility Criteria

    Not everyone’s eligible for equity release in the UK market. You may be limited from going this route if you don’t meet specific criteria, such as age, property value, and outstanding mortgage debt.

    The minimum requirements for equity release2 are that you:

    • Are 55 or older
    • Own property in the UK worth £70,000 or more 
    • Own your home outright or only have a small mortgage left to pay
    • Borrowing against your primary residence

    Impact on State Benefits

    Certain means-test state benefits3 can be impacted by releasing equity on your property. 

    These could include pension credits or council tax reductions.

    The lump sum or additional income could push you above the eligibility threshold for these benefits.

    The Need For a Property Valuation

    A property valuation is required to determine the amount of equity that can be released. 

    This can be an additional cost for the homeowner and can also impact the amount of equity that can be released. 

    For instance, if the property's valuation turns out to be less than anticipated, the amount of equity available for release may decrease.

    Interest Rates

    Interest rates higher than those applied to traditional mortgages are another factor to consider, mainly because the interest rolls up and compounds over the loan's lifetime.

    However, measures are available to counter the effects of compound interest, such as monthly interest repayments.

    It's important to note that interest rates can vary depending on the lender, the type of product, and the individual's circumstances. 

    *While we regularly review our rates, these may have changed since our last update.

    Early Repayment Charges

    Your lender has calculated their return on investment on your equity release based on how long they expect the loan to run.

    So, if you want to pay it back before then, your lender will likely implement early repayment charges to cover any losses they may suffer.

    The early repayment charges in the UK can vary between providers and products. Hence, you must review these with your advisor or broker before signing on the dotted line. 

    Frequently Asked Questions About Equity Release

    Is Equity Release Advisable for Homeowners?

    What Should I Know About the Risks of Equity Release?

    How Risky Are Home Reversion Schemes?

    What Are the Risks Associated With Lifetime Mortgages?

    What Should I Consider Before Opting for Equity Release?

    What Alternatives Should Be Considered to Equity Release?

    What Occurs to My Home With Equity Release?

    What Is the Outcome If I Pass Away After Taking Out Equity Release?

    How Do I Know If Equity Release Is Right for Me?

    Under What Circumstances Can I Use Equity Release?

    What Are the Steps to Set Up an Equity Release Plan?

    Concluding Thoughts on Equity Release in 2024

    Equity release offers both benefits and drawbacks that warrant careful consideration in determining if is equity release a good thing? 

    Advantages include tax-free funds and remaining in your home, while potential negatives include diminished inheritance and affected state benefits. 

    Consult a financial advisor to determine if a mortgage in retirement aligns with your financial needs and long-term objectives.

    Ultimately, the decision should be based on individual circumstances and goals, with a full understanding of the pros and cons of equity release.

    Expert Opinions on Equity Release

    "Equity release can be considered safe. It is governed by UK legislation and providers must be authorised and regulated in the UK by the Financial Conduct Authority ensuring consumer protection however, for best results, it is recommended that you seek professional assistance from a qualified financial advisor."

    Paul Sawyer

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