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Is Equity Release a Good Idea?

Those weighing up options to relieve financial burdens may explore options for loans. If you’re over the age of 55, you may have come across the suggestion of equity release to gain the funds you need to secure your financial future.

Naturally, you’ll want to research before considering the scheme and whether it benefits your long-term financial well-being. This guide will review the question “is equity release a good idea” starting with a recap on the concept.

A Quick Recap on Equity Release

Let’s recap the scheme’s definition to gauge whether equity release is a good idea. An equity release is a loan that unlocks capital tied to your home. It gives borrowers a lump sum of cash or regular income in exchange for a percentage of the value of your property.

Equity release plans are generally available for those over 55 and target prospective borrowers looking to top up their income as they head into retirement. There are two types of equity release, lifetime mortgages and home reversion schemes, which we detail below.

Lifetime Mortgages

Lifetime mortgages tend to be the most popular type of equity release. The plan involves agreeing on a lump sum loan or drawdown facility that provides the borrower with cash against a percentage value of their home.

Borrowers are not required to repay the loan during their lifetime or until they move into care, hence the name, lifetime mortgage. The balance still accrues interest monthly (or annually) until the house gets sold upon death or entry into long-term care, and the debt gets paid from the sale.

Home Reversion Scheme

A home reversion scheme is arguably the less popular choice of equity release. However, that’s not to say that it isn’t as beneficial to an applicant as a lifetime mortgage.

The fundamental difference is that a home reversion scheme involves a partial sale of your home to a lender in exchange for funds. You will still retain the right to live in your home at no additional cost or a modest, less-than-market-value lease. However, the property’s sale proceeds will get split between your estate and the lender.

So what are the key factors that make equity release a good idea in the eyes of prospective borrowers?

How Is Equity Release Meant to Help?

The main driving factor supporting equity release being a good idea is that unlocking such a large amount of capital can relieve any financial burdens. Many prospective borrowers get intrigued that they can get funds against the value of their home quickly. That efficiency helps them plan and budget for their long-term financial future.

Because the money you receive is tax-free and no repayments are required until the house gets sold, it’s a way to get an unrestricted flow of funds. Borrowers can use them as they see fit, with popular options including:

  • Supplement retirement funds
  • Plan for inheritance
  • Unlock capital to help family members with large purchases such as homes
  • Home improvements
  • Purchasing another property
  • Repaying existing mortgages

The freedom behind the equity release funds is fresh air for someone who urgently needs funds. However, like all financial products, there are terms involved in receiving and paying back an equity release.

That begs whether equity release is a good idea surrounding your circumstances. Let’s outline the prominent reasons that support a prospective equity release loan.

Why Is Equity Release a Good Idea?

We compare plans from the leading equity release providers

Here are the leading reasons why equity release is a good idea.

1. The cash you receive is tax-free.

Those looking for options to top up their retirement income or access needed funds may have concerns that prospects such as asset sales will get significantly taxed. Equity release fits into the category of a loan and not earnings. Therefore the funds are not subject to income tax or capital gains tax.

Equity release is primarily a good idea for many. You can release equity on your home without being taxed, receiving a sum as stated in your agreement. That makes financial planning more accessible when you know exactly how much you’re going to get.

2. You don’t have to make repayments until you pass away or move into long-term care.

Once approved for your equity release loan, you won’t have to concern yourself about making repayments. The amount provided is subject to interest if you have a lifetime mortgage and accrue monthly or annually. However, it gets paid back upon the sale of your home.

You can enjoy your funds without the burden of repayments, making it simpler to disperse your equity release capital as you see fit. Once you pass or move to long-term care, the sale of your home will cover all the outstanding balances of the loan, which will never be more than your property is worth.

3. There are degrees of flexibility for financial planning.

Equity release is gaining traction as an excellent financial top-up option for many considering that the market is competitive, and many providers have become flexible with their offerings. Numerous plans will present early repayments, inheritance ringfencing, drawdown facility, and downsizing opportunities.

These additional features on top of the traditional equity release plans can vastly benefit financial planning. Modern equity release loans accommodate the various needs and concerns of those needing capital but wishing to simultaneously take care of their loved ones.

4. It’s a more straightforward way to access a large sum of cash.

Sometimes over 55s will quickly need access to a large amount of cash. Equity release arguably is one of the easiest, most straightforward methods to access that money by unlocking their home’s equity.

You can even create a regular income with a drawdown facility or opt for a home reversion scheme. The basic principle is that financial issues can get solved relatively fast and secure your capital for what could be the rest of your life.

So we’ve reviewed some of the driving factors that make equity release a good idea. But we’d need to look at why the schemes may not be ideal for a prospective borrower.

Is Equity Release a Bad Idea?

There are some scenarios where equity release might not suit needs, financial circumstances, or long-term financial vision like all financial products. Find them below.

1. The costs involved in applying for equity release may not be worth the trouble.

Many providers will make the equity release application process as simple as possible. However, there are very few scenarios where the prospective borrower won’t have to fork out the fees involved in applying. Sometimes, these can get expensive.

The costs involved in the application process include lender’s fees, solicitor’s fees, surveyor’s fees, and the advice of your financial advisor. Some providers will cover these fees to remain competitive. However, the borrower will often have to cover a significant portion of the equity release costs.

2. Equity release can affect your eligibility for benefits.

How equity release affects your eligibility for state benefits isn’t often the first thing that comes to mind. However, should you gain access to your equity release funds, you’ll see what you hold in cash savings rise significantly.

That means you’ll suddenly be ineligible for benefits such as pensions or council tax credits. Suppose any benefits feature in your financial plans to top up income or secure funds over the rest of your life. In that case, equity release may not be such a good idea.

3. Roll-up interest on lifetime mortgages may leave little to pass down to loved ones.

Taking out an equity release loan, especially a lifetime mortgage, may dive into the unknown regarding inheritance. You’ll unlock equity against the value of your home, where you won’t have to make repayments as long as you’re alive. However, the accruing interest may be a concern.

There will likely be a no negative equity guarantee on your loan, meaning that the balance owed cannot exceed the sale value of your property. However, that does mean that your home’s sales could consume the entire amount, leaving nothing to pass down to loved ones.

There’s also the concern that the house must get sold to repay the debt, and loved ones cannot keep the home which can cause some emotional stress.

4. Remortgaging becomes more difficult.

If you seek to remortgage your home for whatever reasons, taking out an equity release loan may make that process significantly more challenging. You may receive early repayment charges or other fees against your equity release plan if you wish to terminate the contract.

These charges can be high and strain finances, making equity release contradictory to its intended purpose. Suppose you believe that you want the flexibility for various financial solutions in the future. In that case, equity release plans may limit your ability to extend those options.

So we’ve weighed up the core points of equity release is a good idea and possibly not such a great one. Let’s move on to the most frequently asked questions surrounding the concept of whether equity release is a good idea.

Is Equity Release Safe?

One of the first questions asked by prospective borrowers involves the safety and security surrounding equity release. Tax-free cash that’s not repayable until death would sound too good to be true to many and make them wonder whether some unseen holes could get them into trouble.

Equity release plans and providers get monitored and regulated by the Financial Conduct Authority (FCA) in the UK, with the Equity Release Council (ERC) serving as the governing body. All equity release schemes must abide by these rules and reassures customers that they get protection from these bodies and retain their consumer rights.

All equity release providers that register with the ERC are perfectly safe and will ensure you understand the terms and conditions behind your loan during the application process. But as transparent as providers are with their plans, that doesn’t mean there isn’t a catch to equity release.

Is There a Catch to Equity Release?

One of the most significant concerns behind lifetime mortgages is that the roll-up/compound interest may eat away at the entire home’s value when it gets sold. You’ll get a fixed interest rate attached to your loan that can be higher or lower depending on your financial circumstances. And while the interest rate remains the same, it applies to the new balance every month or year (depending on the terms).

An example would be an equity release loan approved offering £50,000 at 5%. The compounding interest means you would owe £81,445 after ten years without making any repayments. That interest could mean there’s little left over to pass down to children.

Another catch includes the home reversions scheme where you no longer own your entire property. The cash from your home’s sale must get split between your estate and the lender. So if equity release is under consideration, discuss your concerns with a financial advisor before committing to the loan.

But suppose the catches may not suit your long-term financial vision. In that case, you may wonder if there are any better alternatives to equity release?

Are There Better Alternatives to Equity Release?

Some alternatives may better suit your financial ambitions than committing to an equity release loan. The other options aren’t better as equity release could be the ideal choice to solve any economic issues, but there are numerous possibilities.

Alternatives to equity release include:

  • Selling other assets
  • Remortgaging
  • Downsizing
  • Renting out rooms
  • Borrowing from friends and family
  • Applying for grants

We’ve compiled a guide that outlines alternatives to equity release in detail. You can view other options for these loans here. But if you still think that equity release could be a good idea for you, what should you do to confirm if it’s the right choice?

What Should I Do If I’m Not Sure About Equity Release?

Equity release requires an independent financial adviser to mediate your application, so it might be worth discussing these possibilities with them first. They will help you weigh the pros and cons and give you a more concise idea of whether an equity release is suitable for you.