Is Equity Release a Good Idea?

What are the Pros, Cons & Pitfalls of Equity Release in Jan 2022 & Is It Safe?

Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui

The Million Pound Question: Is Equity Release a Good Thing? Discover What the Experts Have to Say & if You Can Unlock the Retirement of Your Dreams.

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Is Equity Release a Good Idea?

Yes, equity release is a good idea if you get the right advice and have explored all your options.

Here’s more:

Did you know that someone in the UK takes out an equity release plan every 12 minutes?

But, is equity release a good choice in Jan 2022? With all the risks involved, if not done right, unlocking equity could be the biggest mistake of your life.

Luckily, we’re here to support you. This article will help you discover:

  • Is equity release a good thing in Jan 2022?
  • The role of the Equity Release Council and if they protect you.
  • How to identify a safe equity release scheme.
  • The pitfalls of equity release.
  • The essential role of the independent financial adviser on your equity release journey.

As a leading portal for equity release information, we are EveryInvestor are here to help you discover the truth about all things equity release and financial management. Therefore, our team spent hours doing a detailed analysis of the equity release industry in Jan 2022. Here’s what we have found!

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What’s Equity Release?

An equity release scheme is a loan against the value of your primary residence that allows you to unlock tax-free cash. Designed for the older homeowner, an equity release product gives you the option to release money in the form of a cash lump sum, an initial lump sum with a drawdown facility, or a monthly salary over an extended period of time.

The 2 most popular types of equity release are a lifetime mortgage and a home reversion scheme.

Learn More: What Is Equity Release?

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How Does Equity Release Work?

Equity release works by your home being collateral against your equity release loan. The minimum age for releasing equity is 55 as they’re designed for later life. When releasing equity, you won’t be required to make monthly repayments. Instead, equity release products are designed to be repaid at the end of your lifetime. The loan and compound interest are repaid when you die or go to long-term care. Homeowners seek professional advice from financial advisers throughout the equity release process.

Learn More: How Does Equity Release Work?

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Equity Release Types

There are 2 main types of equity release, a lifetime mortgage, and a home reversion scheme. Lifetime mortgages are the most popular type of equity release.

Here’s more!

What’s a Lifetime Mortgage?

A lifetime mortgage is a series of popular equity release plans that allows you to unlock the tax-free cash tied into your property, while still retaining full ownership. You can release equity by opting for a cash lump sum, a lump sum with a drawdown, or a monthly salary. An equity release adviser will give you the equity release advice you need to make the best possible choice. You’ll be charged fixed or capped equity release interest rates.

Full article: What’s a Lifetime Mortgage?

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What’s a Home Reversion Scheme?

A home reversion plan is the second most common type of equity release. With a home reversion, you will sell all or a part of your home under market value. In return, you’ll receive your equity release loan, and have permission to live in your home, rent-free, for the rest of your life.

Full article: What’s a Home Reversion Scheme?

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Commonalities Vetween a Lifetime Mortgage & a Home Reversion Scheme

  • Both a lifetime mortgage and a home reversion scheme may affect your means-tested benefits.
  • When releasing equity, the money you unlock is completely tax-free.
  • Equity release is safe as both lifetime mortgages and home reversions have regulated plans.
  • You can live in your home for the rest of your life.
  • You will require legal advice during the process.
  • The loan, and interest, is only repaid when you die or go to long-term care.

Try our equity release calculator to see how much cash is tied into your home right here!

3 Equity Release Benefits

Do I Need to Get Financial Advice for Equity Release Schemes?

Yes, you do need to get financial advice when unlocking cash through an equity release scheme. The financial adviser will help you find the best equity release options to suit your needs. We always recommend an independent financial adviser as they’re able to give you advice on the whole market. The adviser will help you determine if equity release is a good thing for you and your family.

Here’s more: Getting the Best Equity Release Advice

How Much Money Can I Borrow With Equity Release

What are the Pros & Cons of Equity Release?

The biggest pro of equity release is that you receive tax-free cash to enjoy during retirement. The biggest con of equity release is that the interest can compound quickly if left unpaid.

Pros of Equity Release

Equity release strategies controlled by the Financial Conduct Authority (FCA) 1offer a way for you to get access to the equity tied up in your home.

Here’ll all the positives of equity release that you must know.

So much for possible rate hikes Mr Carney – Maybe next year eh..?

Pro #1. Tax-Free & Fancy-Free

You’ll have tax-free cash to spend any way you like, and you won’t need to pay a charge on the amount that you release. You can use the money to pay off a home loan or other debts, make home improvements, increase retirement income, or simply live a more stress-free life, support your family, and pay for a well-deserved holiday. Wouldn’t it be great to take care of any of these effortlessly?

a&l;'s £7 million ppi fine is a good start

Pro #2. A Fulfilling Retirement in the Home You Love

You’ll be able to remain in your own home even after you’ve released equity. In fact, you are free to live in your home, rent-free, until you die or move to long-term care, making equity release a good way to supplement your income, while still living in your beloved family home.

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Pro #3. No Interest Repayments

There will be no need for any repayments until you pass away or move into residential care. (NOTE: Some homeowners prefer making monthly repayments towards the interest to keep their debt as low as possible.

If this sounds like you, you want to look at an interest-only lifetime mortgage.)

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Pro #4. No Unexpected Fees

You’ll never have to pay more than the value of your home, known as a ‘no negative equity guarantee’. When you die and move to long-term care, your family will generally sell your house and use the balance to pay off your equity release loan. However, if the loan amount is more than the final sale price of your property, your lender will write off the debt balance.

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Pro #5. Low Interest Rates

Having access to low-interest rates is another benefit, and you’ll be happy to know that these have dropped to the lowest levels in 5 years. These days, equity release interest rates are sitting as low as 2.3% to 4.5%, making them competitive with traditional mortgage rates.

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Pro #6. Permanent Cash in Your Back Pocket

Beyond a lump sum, you’ll have the opportunity to release tax-free cash through a drawdown facility or a monthly salary. The monthly salary is a tax-free monthly income to supplement your retirement income. You can get this salary for up to 25 years. With a drawdown facility, you can select to unlock cash whenever you wish. You’ll only pay interest on the money you actually release.

Discover: What’s a Drawdown Equity Release?

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Pro #7. Avoid Inheritance Tax

Paying inheritance tax could be avoided with equity release, so you can spoil your family with a cash gift without having to worry about tax eating it up. Just imagine that! (When it comes to inheritance tax, the rules can be quite complicated, so to save yourself from uncertainty, seek the advice of an expert.)

The Six Disadvantages

Cons of Equity Release

As with anything that comes with advantages, there are equity release disadvantages too.

Since equity release is a loan secured against the value of your home, the repayment of any outstanding money will be made when you pass or move into permanent care.

Here are the equity release pitfalls:

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Con #1. Increased Debt

Your equity release debt will continue to increase due to compound interest, which is when interest is added to the outstanding balance and interest is charged on interest. Any money owed could increase substantially over the years as a lifetime mortgage does not need to be repaid until you pass away or go into permanent care.

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Con #2. Lower State Benefits

Equity release could influence your current and future qualification for means-tested benefits. These benefits can include pension credit, investment funds credit, or council tax benefit. Equity release providers and financial advisers will guide you through the impact on your benefits.

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Con #3. Early Repayment Charges

If you opt for paying off equity release early, you might have to pay a penalty fee, which is why it’s essential to see what charges may apply, even if you don’t think they’ll apply to you. These are referred to as early repayment charges.

a guide to inheritance tax planning trust

Con #4. Lower Inheritance Value

You won’t necessarily be able to leave your house as an inheritance because your home will be sold to repay the scheme provider once you pass away or move out. (Any money that remains will go to your estate to leave as an inheritance. You can also choose to ring-fence a percentage of your home’s value if securing an inheritance for your loved ones is important to you.

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Con #5. Extra Advice Comes With Extra Fees

There are costs involved with equity release. In fact, equity release products usually cost between £1,500 and £3,000, plus the compound interest. Paying interest monthly is not compulsory, but you can repay it, plus up to 10% of the loan manually, should you wish to do so.

Calculating Pension Drawdown Tax using Pension Drawdown Calculator

Con #6. No More Loans Allowed

Once you’ve signed up for an equity release plan, you can’t take out any other loans using your home as security. Therefore, it’s essential to consider equity release carefully before making any final decisions. We advise you to discuss everything with your family and with an equity release specialist.

Who Pays for Funeral Costs

Con #7. Reduced Property Value

By using your home equity, your heirs won’t benefit from constantly increasing property prices. When it comes to equity release, you’re using the value of your property instead of leaving it to your loved ones. With property as an appreciating asset, leaving your home to your family is always a generous inheritance. However, you can protect a percentage of your estate for your heirs. This is known as inheritance protection.

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Is Equity Release Safe Under the Equity Release Council?

Although equity release is very popular as a financial product, there are still a few questions and uncertainties around it. You might be asking yourself: how safe is equity release really?

Here’s what you need to know…

pension options

1. The Financial Conduct Authority (FCA) Oversees Equity Release

The FCA acts as an official watchdog for financial products. It oversees and monitors the industry in the UK specifically. Thanks to the FCA1, consumers’ best interests are protected and equity release is especially safe nowadays. The FCA also provides you with a way to take legal action against the providers who aren’t meeting the necessary requirements.

You're Paying Excessive Fees

2. It’s Regulated by the Equity Release Council (ERC)

The ERC, or the Equity Release Council, governs equity release specifically. It requires its members to follow its strict code of conduct rules and regulations. So, you can rest assured that your money is protected, as well as your rights. If you want to take out an equity release arrangement, make sure that your provider is registered with the Equity Release Council. Then you’ll know that your finances are safe and secure under the ERC’s protective services.

More information: What is the Equity Release Council?

Calculating Your Buy to Let Stamp Duty Rates

3. Your Family Won’t Be Buried In Debt

If you’re thinking about taking out a lifetime mortgage and it’s with an approved equity release lender, you will most definitely need the ‘no negative equity guarantee’ to safeguard your family. The ‘no negative guarantee’ was created solely for protecting you. Simply put, it ensures you will never owe more than your property’s value when it is sold, even if house prices rise. Better yet, your family won’t have to settle your debt once you’re gone.

What Happens If You Sell The Shares

4. You Can Live In Your House

When it comes to lifetime mortgages and home reversion schemes, you get to stay in your house. And you don’t even have to sell part of your house to get the money you need. You’ll be borrowing it against equity. For this reason, you can continue living in your house (of which you’re the owner) for as long as you want to.

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5. You Can Move To A New House

Contrary to popular belief, taking out equity from your home doesn’t tie you up to that home for the rest of your life. If you want to move into a new house, you absolutely can. The ERC gives you the right to take your equity release mortgage to your new home, as long as you’re moving to a satisfactory home that meets your providers’ rules. However, you’ll need to move to a cheaper home if you don’t want to pay the difference.

Voluntary Repayment Lifetime Mortgages

6. You Must Consult an Adviser

The ERC requires that you ask a professional for advice before you can apply for an equity release product. Furthermore, this professional adviser should be a qualified equity release consultant. The Equity Release Council keeps a directory so that you can confirm they’re qualified.

Getting A Grant

7. Your Estate May Retain Inheritance

As you know, equity release loans need to be repaid when your house gets sold by your provider, including the interest that it’s accrued. You should also know that this will eat into your inheritance. If there’s money left after the loan has been repaid, your heirs (according to your will) can receive that.

review your equity release plan

Equity Release Myths Debunked

In years gone by, equity release was a negative industry, fraught with dubious lenders. However, things are vastly different in 2021. Here are the essential equity release myths, debunked:

More: Equity Release Horror Stories & Their Relevance in Jan 2022

Myth #1. Your Family Could Owe MORE Than Your Property IS WORTH

If you select equity release mortgages from a provider approved by the Equity Release Council2, you’ll never owe more than the value of your house after its sale. This assurance is called a no-negative-equity guarantee. The no-negative equity guarantee means that if your home sells for less than the mortgage value, the difference will be written off. Usually, any funds left over after the mortgage has been settled will be paid to the beneficiaries in your will.

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Myth #2. It’s Costly And You Will Have to Pay Monthly Instalments

A lifetime mortgage does not come with monthly payments unless you chose this specific type of plan. Some plans allow for optional payments of 10% or less of the mortgage balance annually, penalty-free.

what's a lifetime mortgage

Myth #3. You Will No Longer Own Your Property

An equity release product is not the same as selling your home. Instead, you’re borrowing against your home. This means that you’ll maintain ownership of your property. A lifetime mortgage is, in essence, a long-term loan, which you repay with your property. A key difference is that it has no fixed end date.

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Myth #4. A Mortgage Prevents You from Releasing Equity on Your House

If you have a mortgage on your house, you’ll still be able to release equity from your home. An often-cited reason for taking out a lifetime mortgage is to leverage the value of your home to repay an existing mortgage. A lifetime mortgage allows the customer to receive cash in return and for the equivalent of the first charge on their home. This cash can be used, in the same legal transaction, to repay an existing mortgage. The lifetime mortgage also gives them the benefit of a life term with no concerns over repayment.

laying out all the equity release facts

Myth #5. Equity Release Will Affect Your Family’s Inheritance

In the last few years, lifetime mortgages have become more flexible, with numerous products and plans available. Some options will let you keep a portion of your equity aside to leave to your family as an inheritance.

Are You Entitled To State Benefits

So, Is Equity Release a Good Idea?

Yes, equity release is a good idea if you seek top financial advice, your adviser confirms that it’s right for you, and you have explored all alternative options.

Common Questions

Is Equity Release A Good or Bad Idea?

What Are the Advantages to Equity Release?

What Are the Disadvantages to Equity Release?

Is Equity Release Safe?

In Conclusion

So, we’ve covered the ins and outs of equity release, its pros and cons, and how it works. It’s a great and easy way to get some extra cash flowing into your bank account, with many perks that come along with it!

Looking for a breakdown of equity release costs in Jan 2022. Check these out right here!

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Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.

 

  1. How profitable are Equity Release Mortgages
    2020 Economics Letters Volume: 197, pp 109651 DOI: 10.1016/J.ECONLET.2020.109651
    Dean Buckner 1,Kevin Dowd 2
    1 The Eumaeus Project, United Kingdom,2 Durham University 12
  2. Understanding Attitudes to Paying for Care amongst Equity Release Consumers: citizenship, solidarity and the ‘hardworking homeowner’
    2016 Journal of Social Policy Volume: 46, Issue: 1, pp 49-67 DOI: 10.1017/S0047279416000416
    Louise Overton 1,Lorna Fox O’mahony 2
    1 University of Birmingham ,2 University of Essex 123
  3. Can equity release help older home-owners improve their quality of life?
    2010
    Jerome Billeter 1
  4. Home equity release for long term care financing: an improved market structure and pricing approach
    2015 Annals of Actuarial Science Volume: 9, Issue: 1, pp 85-107 DOI: 10.1017/S1748499514000268
    Doug W. Andrews 1,Jaideep S Oberoi 2
    1 University of Waterloo ,2 University of Kent 1234
  5. Pensions and housing wealth: Quantitative data on market conditions for equity release schemes in the EU
    2016 Thuenen-Series of Applied Economic Theory
    Peter Hennecke ,Pierluigi Murro ,Doris Neuberger ,Flaviana Palmisano 1
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She writes on the topics of equity release, home reversion, and mortgages.

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Nicola is a financial writer for EveryInvestor and is passionate about the opportunities that equity release can open up for homeowners. Her extensive business experience and deep understanding of the industry means that she’s always up-to-date with the latest developments.