Is equity release a good idea?

Many people want to keep living in their homes when they retire. However, there may be cash tied up in your property that you can only access when you sell to move elsewhere or downsize. This is where equity release comes in.

What is equity release?

Equity release is a process through which you can access the money tied up in your property when you're older (typically at least 55 years old) by borrowing against the value of your house. You usually won't need to repay the loan or the interest you accrue until you die or move into a care home permanently. Instead, the loan and interest are repaid after you sell your property.

Among the most common types of equity release are lifetime mortgages and home reversion plans. They both work similarly in that you can benefit from the money tied up in your home right away and you can continue living there. However, there are also some key differences.

If you opt for a home reversion plan, you sell a portion of your property to a provider and get a payout, while with a lifetime mortgage, you take out a loan against your property and interest then accrues.

With a home reversion plan, the provider will buy a share of the property for a price that's typically significantly below the market value. This is usually between as low as 20%, but can be up to 60% of the value of the share they're purchasing. They then hope to recoup their costs and make a profit when your home is sold at its new market value when you die or move into care.

With a lifetime mortgage, the lender "loans" you cash against the value of your home. Typically, they won't loan you more than 60% of the value of your home and even this is quite rare. You continue to own the property, but you're charged interest on the loan which will need to be repaid in addition to the loan from the sale of the property. Lifetime mortgages are the most popular type of equity release product.

As you can tell, equity release products vary significantly and they're not necessarily right for everyone. We explore whether they might work for you below.

Is equity release a good thing?

Equity release can be a good thing in certain circumstances. For example, if you know your pension pot won't provide the retirement you're looking for and you've run out of time to save and invest, releasing equity from your home can be one way to give yourself the lifestyle you want (or need). You could downsize to fund your retirement too, but many people love their homes and want to keep living there. Equity release allows you to do this, giving you access to the extra money you may need.

Equity release does come with some drawbacks too. While you'll be able to stay in your home and won't need to pay anything until you die, if you want to leave behind a sizeable inheritance for your family, an equity release product will inevitably eat into that.

In some cases, where you don't have beneficiaries or where you are struggling financially but want to keep your home, equity release could work for you. We explore some of the scenarios where you might want to consider equity release in more detail below.

When might equity release be a good idea?

There are a few scenarios where equity release might be a good idea.

You'll have extra income to fund your retirement

If you don't think your pension pot will be able to fund the retirement you were hoping to have, equity release could provide additional income. That being said, most people are eligible for the state pension which is £221.20 per week (or around £11,500 per year) which kicks in when you turn 66 (but is due to go up to 67 soon).

As such, it's worth looking at your pension pot in addition to your state pension before you decide whether you want to release additional equity from your home. We discuss your pension options at retirement in our article on the topic to help you decide how best to use your pension pot. In addition, our free pension calculator will help you determine whether you'll have enough money to fund your retirement plans.

However, if your pension pot and state pension won't provide the income you were hoping for and you don't wish to downsize, then equity release could be an option.

You'll be able to fund home improvements

If you're hoping to continue to live in your home until you die or move into care but want to benefit from home improvements, then equity release could be a good way to fund your plans without having to dip into your pension pot or other savings. Remortgaging is an option too, but if you remortgage, you will need to repay the loan with interest which could make it difficult to retire when you want to or with a substantial pension pot. In this circumstance, equity release could be the way to go.

You could help out your children and grandchildren now

You could give your children and grandchildren an early inheritance now instead of having to wait until you die. This could help them get on the property ladder or fund further education, for example. Keep in mind though, there are rules around gifting money to children and grandchildren. Typically, you can only gift around £3,000 a year to your family, and this will be free of inheritance tax as long as you don't die within 7 years. We explore how to avoid paying inheritance tax in our other article.

Potential downsides of equity release

There are a few potential downsides to equity release that you should consider before you go down this route.

You'll need to budget for the costs involved

Whatever product you choose, there'll be a whole host of costs involved that you'll need to budget for. Some of the costs you'll need to think about include:

• Financial advice before making a deal - The Financial Conduct Authority (FCA) has a requirement that you should seek advice from an equity release adviser before you take out a product. This ensures that you understand the implications of releasing equity and have been provided with all of the information you need to make an informed decision. Fees vary but can range from a few hundred pounds to somewhere in the region of £1,500.
• Set up fees - There will typically be arrangement fees for the product you choose and solicitor fees you'll need to factor in as well.
• Interest (if you choose to repay it) - With a lifetime mortgage, interest will accrue for as long as you're alive or living in your home. Compounding means that the interest can add up. However, you can choose to pay off some of it which could be a good way to leave a larger inheritance for your beneficiaries.

Overall, the costs for taking out an equity release product can range from around £1,500 to £3,000. This does not include the interest which you may choose to pay.

You may not be able to give your family the inheritance you would have liked

Whether you take out a lifetime mortgage or opt for a home reversion plan, you're giving up a portion of your property away in exchange for cash. This means that the inheritance you leave behind will be reduced. In some cases, particularly if you're trying to reduce your inheritance tax burden, this might be fine, but it is important to understand how a reduced inheritance may impact the family and friends you leave behind.

You could face negative equity if the value of your home falls

The vast majority of equity release products in the UK feature a 'No Negative Equity Guarantee' which ensures that even if the sale of your home does not recoup the equity you released and the interest you accrued, your lender can never claim more than the home is worth when sold.

This protects the rest of your estate, but it does mean that you might not be able to leave a portion of the property's proceeds to your family. In addition, you could end up in a situation where you only "released" 20% of the value of your home at the time, to end up giving up your entire home plus any increase in value over the years. This is a fairly significant downside, particularly if you have beneficiaries.

Additional considerations of equity release

There are some other considerations to make before you choose the equity release route. There could be an impact on means-tested benefits and it can be difficult to reverse the decision in the future. We explore what this means in more detail below.

Additional income received through equity release could impact your benefits

Means-tested benefits take into account liquid assets (i.e. money that can be accessed easily), so could be affected by a payout from equity release. Some of the means-tested benefits that could be affected include universal credit, council tax discounts and assistance from care services funded through the council. However, other benefits, like your state pension, won't be impacted because they aren't means-tested.

It can be hard to reverse this decision if you change your mind

There are ways to get out of your equity release arrangement, but it can be a costly process. In many cases, you'll need to pay an early repayment charge as well as pay off your loan and any interest you've accrued in full. As such, choosing equity release should only be carried out after careful consideration.

Seeking independent financial advice is a good idea, particularly if you're unsure whether this is the right course of action for you. If you are considering equity release but have further questions, you can book a free no obligation equity release consultation via our website.

FAQs about equity release

We've answered some of the most commonly asked questions about equity release below.

What is the downside of equity release?

Some downsides to equity release include receiving less than what your home is worth with products like home reversion plans, paying upfront costs to set up the product and leaving a smaller inheritance to your family and friends.

What is the catch with equity release?

With products like home reversion plans, you get a lot less than your home is worth (between 20% to 60% of the value of the part of the home you're selling). Equity release products like lifetime mortgages also need careful consideration because you accrue interest which must be paid in addition to the loan when you die or move into care. If your home falls in value, you may end up in negative equity which means you can't leave any of the proceeds of the property to your family as it will be used to pay off the loan.

Is there a better alternative to equity release?

Whether there are better alternatives to equity release depends on your particular circumstances. For some people, equity release will be the right choice. For others, there may be alternative options to explore. For instance, if you're still working, you might opt to remortgage to get the funds you need right now (this is a popular way to fund home improvements). You will, however, need to repay the remortgage loan plus interest. Or, if you want some extra cash to fund your retirement, you might consider downsizing to a smaller property. That way, you'll still have a property you own fully and can pass on to your family while also benefitting from the remaining cash from the sale.

Can I sell my house if I have an equity release?

You can still sell your house if you take out an equity release product, however, there may be costs involved and you'll need to agree what to do about your product with your lender. With many products, you can choose to "port" your product to a new house much like you would with a regular mortgage. If, however, your new home is worth less than your old home, you may need to repay some of the loan.

Some people choose to pay off the equity release loan they've taken out before they move. However, this can be costly. For instance, with many products, you'll need to pay early repayment charges on top of paying off the loan and interest you've accrued. In both cases, you'll also need to budget for the costs associated with selling and moving home, such as conveyancer fees and surveys.