The pros and cons of equity release

Most equity release schemes are ‘lifetime mortgages’ which give you an upfront payment, but don’t require any payments to be made in return. Instead, the interest is rolled-up and added to the debt that needs to be repaid when your property is sold (usually after you die or move into long-term care).

Some equity release schemes are called ‘home reversion’. They require the homeowner to sell either a proportion or all of their property to a home reversion provider, for less than its market value. The homeowner can continue to live there as a tenant, and the property is sold when they die or move into care. The proceeds of the sale are divided up according to the agreement’s terms.

An equity release product will typically pay you a lump sum, or series of smaller payments, which equate to a proportion of your home’s total value.

For lifetime mortgages the proportion very much depends on your health and age, but will typically offer between 25-55%. The older you are, the higher the proportion you’re likely to be able to borrow. For home reversion it can be as high as 100% of the home’s value.

As with most things in life, there are advantages and disadvantages, and if equity release is something you’re considering, you should be fully aware of the implications. It’s important to speak to a qualified expert, like an independent mortgage adviser or later-life financial planner, before making any decisions.

For most people, the main advantage of equity release is that they can receive money without moving. Elderly people might not want the expense or stress of downsizing, and would rather enjoy their retirement in the comfort of the home they know.

Any money you receive from the value of your property is paid to you tax-free. That can be a valuable form of income, or can be used to support other personal or family goals.

You don’t need to worry about keeping up with monthly repayments because there typically aren’t any. You can choose a scheme that lets you make interest payments to reduce the amount owed. But in most cases, people opt to repay the debt upon their passing or when the house is sold.

Many equity release schemes allow you to receive regular payments rather than a one-off lump sum. This can help some people budget and manage their money more effectively over a long period of time and ensure they don’t run out.

An equity release-based loan is usually fixed for the entire duration of the loan, and the interest rates are generally lower than most other forms of lending.

If you plan to help your family out while you’re alive, the financial gifts made during your lifetime could help reduce your estate’s exposure to IHT. This is dependent on your individual circumstances, how long you live for after the gift is made, and the value of the gifts. But, done right, it could help you pass on your wealth and minimise the tax your beneficiaries would otherwise have to pay on your estate.

For more information, see Setting up trusts and gifting in your lifetime

Equity release is not the right answer for everyone – especially if you’re able to fund your retirement or gift your children by other means. Seeking advice from a qualified professional may help uncover alternatives to sourcing income, such as downsizing or using other assets and investments. They will also be able to help you better understand the potential pitfalls you might face, some of which we’ve summarised below.

Many people’s biggest asset is their home, and when you die, your loved ones will often inherit the property as part of your estate. So, before you take out equity release on your property, it’s wise to discuss it with your family first.

If you change your mind and choose to pay back the equity release mortgage early, the penalties for doing so are likely to be high.

As with a standard mortgage, there are likely to be additional set-up fees which can be expensive. These might include the loan application and valuation fees, as well as legal and financial planning costs.

This may be a problem, especially if the value of your house remains the same or falls. For example, an interest rate of 5.5% on a £100,000 mortgage over ten years would add interest costs of over £70,000. You can see that if the property market stops moving upwards, there’s less value left in your home to leave to your children.

Most equity release providers have signed up to a minimum set of standards set by trade body, the Equity Release Council (ERC). Their members offer a “no negative equity” guarantee, which means that if the value of your home falls below the value of the loan, you won’t be asked to pay back the difference.

If you opt for a home reversion scheme to release a proportion of your property’s value – let’s use 35% as an example – then the home reversion provider will own that 35% stake in your home. When you die or sell your property, they will receive 35% of the proceeds from the sale (which could be a lot more than it was worth at the outset). This doesn’t apply to the more popular lifetime mortgage equity release schemes.

Choosing to release equity tied up in your property is not one to be taken lightly. However, if all of your money is tied up in property and you want to continue living in your house, equity release can offer a route towards a more comfortable retirement, a lump sum gift to your loved ones, or another financial goal.