In 2024, equity release offers financial flexibility and tax-free cash but also has downsides like reduced inheritance and potential impacts on benefits. So while it can provide financial security, high fees and interest rates can be concerning.

So, what is the truth?

Before deciding if this option is right for you, carefully weigh the equity release pros and cons.

EveryInvestor is committed to delivering accurate, up-to-date content to help you navigate the equity release process with confidence and ease.

Explore the essential features and find out the pros and cons to consider.

Therefore…

What is an Equity Release Mortgage and How Can It Benefit You?

An equity release mortgage allows homeowners to access their property’s value without selling, benefiting you by providing tax-free cash to supplement retirement income or fund other financial needs.

Read On: How to Boost Your Retirement Income

Explanation Of An Equity Release Mortgage

An equity release mortgage allows homeowners aged 55 and older to access their property’s value as cash without moving, designed for those seeking flexibility in retirement, enabling them to tap into the equity built up in their homes.

Equity release typically funds home renovations or adapts properties to suit changing mobility needs by accessing the cash tied up in your home, offering a way to achieve financial goals without selling the property.

If you’re interested in learning more about how equity release works and how it can benefit your financial planning, consider speaking with a professional adviser.

2 main equity release options exist: Lifetime mortgages and home reversion plans.

Lifetime mortgages are the most common form of equity release, allowing you to borrow against your home with the loan and accrued interest typically repaid from the sale of the property when you pass away or move into long-term care.

Home reversion plans involve selling a portion of your property in exchange for a lump sum or regular income while allowing you to continue living in your home rent-free, with the option to sell between 20% and 100% of your home, depending on your needs.

Keep in mind

For privacy-conscious individuals, an equity release calculator that doesn’t require personal details can help assess potential funds without disclosing sensitive information, allowing you to estimate how much equity you can release.

Prospective participants should consider both the initial setup costs and ongoing fees to fully understand the financial implications.

What Are the Benefits of Equity Release?

The benefits of equity release 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. 

Homeowners should carefully compare different equity release rates before making a decision.

Let’s take a detailed look at each of these equity release benefits

Access to Cash

Equity release provides a way to access tax-free cash in your retirement, proving particularly beneficial for those without significant savings or pensions and offering additional funds to cover living or care expenses.

Many homeowners use equity release to finance home improvements, and by tapping into this source of cash, retirees can enhance their quality of life and financial security.

No Need to Move

With equity release, there is no need to sell up and move to access funds; you can remain in your home until you pass away or go into long-term care.

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

Tax-Free Money

Because it is classified as a loan, the cash received through equity release is tax-free; how the funds are used, however, could potentially be subject to taxation.

Inheritance Protection

Inheritance protection for equity release ensures a portion of your home’s value is reserved for your heirs, allowing you to access funds while safeguarding part of your estate for future beneficiaries.

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

Additionally, it is considered a debt and therefore reduces the value of your estate, meaning your heirs will not need to pay inheritance tax if the loan has dropped the value of your estate under £325,000.¹

Future Housing Options

Equity release may introduce future housing options, including downsizing, relocating to retirement communities, or modifying your current home—each offering different benefits and challenges based on your financial needs and lifestyle preferences.

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.  

Read More: Should I Downsize Instead of Releasing Equity?

No Monthly Repayments

With equity release, it’s not required for you to make monthly repayments as the loan is only repaid when the plan ends.

The plan usually ends when the borrower passes away 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 is something illegal.

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

But what about the downside to equity release schemes?

7 Equity Release Pitfalls & Cons

The 7 main pitfalls include rapidly increasing debt owing to compound interest and potential early repayment charges.

The seven pitfalls are… 

• Inheritance reduction
• Diminishing the homeowner’s equity
• Strict eligibility criteria
• Impact on state benefits
• Need for a property valuation
• High-interest rates
• Early repayment charges

You may have come across unsettling stories in the news, so what do you need to know? Whilst equity release can become costly if not properly managed, understanding the potential risks can help you navigate possible issues and help you decide if equity release is the right option for you.

A more detailed insight into each of these downsides… 

Reduced Inheritance

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

They will receive whatever is left 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 reduces 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 is crucial to consider 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 is eligible for equity release in the UK market. You may be limited from obtaining equity release if you do not 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 benefits can be impacted by releasing equity on your property.³

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 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 equity release 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 is important to note that interest rates can vary depending on the lender, the type of product, and the individual’s circumstances. 

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

Early Repayment Charges

Your lender will likely implement early repayment charges to cover any losses they may suffer, as they have calculated their return on investment on your equity release based on how long they expect the loan to run.

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. 

How Can an Equity Release Calculator Help Me Plan My Finances?

An equity release calculator can help you plan your finances by estimating how much cash can be released from your home and aiding in informed decision-making, proving a valuable tool.

By inputting details such as your age, property value, and any outstanding mortgage, you can receive an approximation of the lump sum or income you may receive.

This calculation can help you plan for retirement by providing a clearer picture of your financial options and allowing you to assess whether equity release fits into your long-term financial strategy.

Frequently Asked Questions About Equity Release

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, whilst 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.

Comprehensive financial advice goes beyond equity release, encompassing a holistic approach to managing and growing your wealth.

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

Access comprehensive equity release services tailored for Northern Ireland, ensuring a suitable financial solution.