Equity release may be a good option for you, but it’s important to weigh up the advantages and disadvantages first. Releasing equity is a big financial decision.
The two main schemes available are lifetime mortgages and home reversion plans. They are different in a number of ways, so chances are one is a better option for you than the other.
Don’t take equity release lightly – it is a big decision and you must consider your options very carefully. Always seek independent financial and legal advice before committing to a decision.
The pros of equity release
You raise tax-free cash that you can spend however you please
The money raised by releasing equity is completely tax-free and can be spent however you like. There are many reasons people release equity, but the most common ones include:
- Making improvements to the home
- Paying off the mortgage or other debts
- Supplementing income to maintain a certain lifestyle
- Paying for a once-in-a-lifetime thing like a holiday
- Helping family
You can stay in your own home
One of the alternatives to equity release is downsizing. This is where you sell your home and buy a smaller one that is less expensive, topping up your pension pot with the remaining cash.
With equity release, you don’t have to relocate. Some people even decide to use some of the cash they raise to upgrade their current home. This way, you can stay in the home you love and enjoy retirement without having to worry about making repairs or moderations as you get older.
Equity release allows you to retire peacefully without having to worry about the stress and expense of moving and adjusting to new surroundings.
Monthly repayments are not mandatory
The loan plus interest that comes with equity release doesn’t have to be repaid until your home is sold, usually when you die or move into permanent residential care.
This means there will be no increase to your monthly outgoings and you’ll have a clear picture of where you stand. Some people choose to pay off the interest in the form of monthly payments to keep the debt lower. If this sounds like something you would like to do, you can choose an interest-only lifetime mortgage.
You’ll never owe more than your home is worth
If your lifetime mortgage provider is a member of the Equity Release Council then they must offer a ‘no negative equity guarantee’. This is designed to ensure that your family never inherits a debt if the sale of your home doesn’t fully cover the loan.
You can access the money as and when you need it
You can choose a lump sum payment, but there is also a drawdown lifetime mortgage option that enables you to access smaller amounts of money over time. This can give you a regular income up to a predetermined limit each year. Interest is only charged on the money you withdraw, so it could save money in the long-term.
There are low interest rates available
Equity release currently comes at the lowest interest rates we have seen for 5 years. The average interest rate for customers aged 65+ was 4.55% as of January 2020.
It could help your loved ones avoid inheritance tax
The money raised through equity release can be given to your family as a cash gift which may help to avoid inheritance tax. Be advised, however, that inheritance tax rules are quite complex, so you should seek professional advice before gifting money.
The cons of equity release
Interest rates mean your debt goes up
Equity release loans are subject to compound interest. This means interest is added each year to both the lean amount and the interest that’s already accumulated. Lifetime mortgages don’t have to be repaid until you die or move into permanent care so the amount owed could grow significantly over the years.
This debt can be reduced if you pay the interest off gradually via an interest-only lifetime mortgage. We have more advice elsewhere about the costs associated with equity release.
Your benefits may be affected
Releasing cash from your home reduces the value of your estate. If you keep the funds in an account, your entitlement to means-tested state benefits could be impacted. This includes things like savings credit, pension credit and council tax benefit.
Even if you don’t claim any of these benefits now, you should think about whether you might need them in the future.
There may be early exit fees
A lifetime mortgage is a commitment for life. If you choose to pay it off early, there could be a fee for early repayment. Make sure you know about these charges before you apply.
Your home can’t be left as an inheritance
When you die or move out permanently, your property will be sold to repay your debt to the scheme provider. The only money that can be left as an inheritance is whatever remains after the debt plus interest has been repaid in full.
There may be set up fees
Arrangement fees are often associated with equity release schemes and you may also have to pay for professional advice.
It won’t be possible to take out any other loan against your house
Once you have taken out an equity release scheme, your home can no longer be used as security for any other loans.
If you’re wondering about the safety of equity release schemes, or about how much equity you may be able to release, Think Plutus has various in-depth articles that can help. However, there is a lot that needs to be taken into consideration so it is essential that you seek professional advice.
Think Plutus specialises in equity release as well as protection advice so we can give you bespoke, detailed advice based on your circumstances. Get in touch today to get answers to your questions and arrange a free consultation to determine your best options. We also recommend speaking to a solicitor for independent legal advice on the matter.
Think Plutus is just a phone call or email away, so make the first move and enquire today.