Those homeowners researching solutions to top up their finances in older stages of life will come across equity release as an option. Your experience in life will probably dictate that everything has a catch, despite the equity release scheme looking like a great option to get the cash you need.
This guide will assist your research by walking through the pros and cons of equity release. But first, let’s start with why the plans get considered in the first place.
It’s no secret that the UK has an ageing population with over 15 million persons aged 60 and above. The more people fitting into that age bracket means many struggles to find the income they need to fund retirement. They also may need assistance with other expenses where others don’t have the means financially.
Equity release schemes have become more popular as they provide a solution to retirement finances, offering an income where there’s none other available. They unlock a significant portion of cash against a percentage of the value of their property, only to get paid back upon death or move into long-term care.
The cash helps fund retirement, helps families with expenses, and assists with estate planning. But like all financial products, there are advantages and disadvantages to consider.
We’ll walk through the leading pros and cons of equity release.
Let’s look at the positives of equity release and why people choose these plans as financial solutions.
Arguably, the most significant positive of taking out an equity release plan is that you can unlock a large amount of cash that isn’t taxed. The money comes as a percentage of your home’s value, which can significantly boost your finances.
You’re free to spend the equity release loan as you please, without restrictions. As the schemes are only available to older people, many choose to take out a plan to help with more enormous expenditures such as:
Fast access to cash without tax is often helpful in planning and achieving a long-term financial vision.
Unlike traditional loans, equity release doesn’t require the borrower to make any repayments until they pass away or move into long-term care. The debt gets settled from the sale of the home, meaning the proceeds will cover the original balance and the interest accrued over the loan’s lifespan.
The money you receive doesn’t get eaten away by monthly repayments. Neither is it subject to tax, making budgeting much easier when you don’t have to account for traditional expenditures. However, we note that the interest does compound monthly (or annually) and is payable upon death or admission to care.
It doesn’t matter which type of equity release you take out, a lifetime mortgage or a home reversion scheme. You’ll receive a guarantee that you’ll be able to remain in your home for as long as you’re alive. This fact is mainly a concern with a home reversion plan where you sell part of your property to the provider, but rest assured, you won’t have to move out.
Equity release is an ideal alternative to downsizing. You can gain the funds you need to live without leaving home you love. You’ll also be able to achieve the capital required to make home improvements to increase the property’s value.
The compounding interest is the most pressing concern on a lifetime mortgage, as it continues to roll as long as the loan is active. The worry comes from the idea that the rolling interest could exceed the house’s value when the property gets sold, leaving beneficiaries lumbered with the leftover debt.
The Equity Release Council (ERC) rules state that providers must offer their plans with a no negative equity guarantee. That means the amount owed cannot exceed the figure acquired from the sale, so nothing extra will have to be paid post-sale.
If you decide to take out a lifetime mortgage, you’ll have options to either receive your funds as a lump sum or place them in a drawdown facility. The latter operates like a savings account where you’ll only take cash from the amount you need and can receive a regular income this way.
That ensures borrowers don’t overspend or exceed their budget when taking out an equity release loan. And the most intriguing part of a drawdown facility is that you only get charged interest when you take funds out of the account rather than compounding monthly.
You can argue that there’s never been a better time to take out an equity release loan, as the interest rates are the lowest they’ve been in a while. Borrowers can take advantage of the fact that their original balance won’t be subject to higher interest rates. That potentially leaves more for your beneficiaries in your home’s sale.
It’s still strongly recommended to review the interest rates on your equity release before making a decision. But you’ll see they are lower than they have been over the last few years.
Financial planning is one of the main reasons older persons take out equity release, including looking at what happens after you pass away. In the UK, inheritance tax applies to passing finances down to your beneficiaries, even if you give cash seven years in advance.
But that limit allows persons to give cash as a gift without being subject to inheritance tax. If your beneficiary receives the money over seven years before you pass, the funds are effectively tax-free,
We note that inheritance tax rules are particularly complex. One should consider professional advice to ensure the correct course of action.
So with every financial product, with advantages come the disadvantages. Let’s touch on the significant cons of equity release.
We compare plans from the leading equity release providers
Here are some of the disadvantages of equity release.
Rolling/compound interest is arguably the leading concern behind taking out a lifetime mortgage scheme, mainly because it’s the primary driver behind the equity release horror stories out there. Interest will accrue on your loan as long as it’s active, where the final balance may amount to the total value of your home.
That means that when your property ultimately gets sold, there’s nothing left to pass down to beneficiaries, either finances or property. The balance owed is known to hit triple what you got in equity release, leaving borrowers in a more tricky financial position than when they entered the agreement.
It would feel that providers would want their funds returned to them as soon as possible, but that’s not the case with equity release. Borrowers take out lifetime mortgages, assuming the money won’t get paid back until they pass or move into care. The loan received gets worked out according to those principles.
Early repayment charges apply because they could cost the provider more money to cover the cash they borrowed to fund your equity release loan. Often, these fees can get quite expensive, so if you need to pay back your loan for whatever reason, it could be costly.
On the subject of expenses, many borrowers overlook those setup fees involved in equity release. Because the application process involves your property as a security, there are a few intermediaries in the mix. Naturally, each has its fees.
Applying for equity release means you’ll have to cover a few expenses. You’ll pay the lender’s fees for processing, surveyor’s fees for property valuation, solicitor’s fees to finalise, and financial advisors to process the application. Ultimately, you could find yourself paying more to apply than intended.
If you decide to take out an equity release plan, you won’t be able to take out any more loans using your home as security. That can be a bit of a concern should borrowers need options to top up their finances later.
While equity release is a great way to get access to a large amount of capital quickly, the matter of fact is that funds do run out. If you cannot take loans out against the primary asset in your portfolio, you might be stuck on what to do next.
Once you commit to equity release, there’s an expectation from the provider that your home will get sold to cover the debt after passing or transfer to long-term care. Suppose there’s an emotional attachment to the property or any reason why your beneficiaries want to keep it. In that case, they will not be able to retain the house.
There are instances where the provider will allow the loan to get repaid through other means. However, the outstanding balance is often too much to cover through personal savings or selling other assets.
One disadvantage that prospective borrowers often overlook is that equity release may make you ineligible for state benefits. Accessing a large amount of cash will put you over the government thresholds that deem you can support yourself without state assistance.
Not being able to access benefits may not be part of your long-term financial plan. Older persons usually need pension credits and council tax benefits as they age. They become ineligible if they have a significant portion of cash in their accounts.
Now with the disadvantages noted against the advantages, you may wonder whether equity release is a suitable financial solution. How do you weigh up the pros and cons in deciding whether equity release is a feasible option for your circumstances?
There’s a lot of information above relating to the pros and cons of equity release. The schemes themselves can be complex, so more meticulous details are provided in defining the advantages and disadvantages.
Advice from an independent financial adviser helps make the ultimate decision. However, we can outline the pros and cons of equity release in a more straightforward format to help you consider if it’s a good idea.
The brunt of the pros in equity release is that you can unlock a significant portion of cash when you need financial assistance most.
The core of the equity release cons is that the amount owed after death or care transfer leaves very little for your beneficiaries. So ultimately, weighing up the pros and cons of equity release involves whether the cash you get now supersedes your concerns about what happens after you pass away.
So all considered, is equity release right for you?
The best course of action is to speak to a financial advisor, as everyone’s circumstances are unique. However, there is a general principle where equity release might be an excellent option to increase your income.
Suppose you have reviewed all other options and alternatives, but equity release remains the most attractive choice. In that case, it is probably right for you. Research plans according to your financial position, and see what providers offer and whether it fits with your long-term economic vision.