The pros and cons of equity release

Equity release products allow people over the age of 55 to release some of the cash locked into their property and continue to live there at the same time. It's a way to benefit from the appreciation of your property without having to downsize. Equity release loans are paid from the sale of the property after the homeowners die or move into care.

Understanding the pros of equity release

Some of the advantages of equity release include the fact that you get tax-free cash locked up in your home, the opportunity to stay in your home and the peace of mind that comes with not having to make any repayments until you die. We explore these pros in more detail below.

You can get tax-free cash now

Cash you get from an equity release product is not subject to tax which means you get to keep all of it and spend it how you like. Depending on what you do with your cash, however, it could end up being taxed. For example, putting some of the cash in an interest-earning savings account or even investing in a general investment account could result in tax on the interest or gains you've made. That being said, the lump sum you get initially is tax-free and with careful planning and using tax wrappers like ISAs, you can keep it that way.

You can live in your home until you die or go into care

In addition to getting tax-free cash you can use right away, you're also able to continue living in your home until you die or go into long-term care. This means you don't have to worry about downsizing and leaving your home if you like living there.

You don't need to make any repayments until you die

The money you owe will be paid from the proceeds of the sale of your property after you die or go into long-term care. This means you won't need to worry about paying off the interest (unless you want to) or any of the loan itself while you are still alive. As such, you can enjoy the money you get from the equity release product without worrying about what happens later. It's worth keeping in mind, however, that you are effectively reducing the size of your estate which means a smaller inheritance for your family and friends when you die. Depending on your circumstances, this can be a concern.

Based on these pros, it may look like equity release is a way to "have your cake and eat it". You get to stay in your home as well as benefit from its appreciation. That said, it's not right for everyone and it's important to understand some of the downsides of equity release before you make a decision.

Understanding the cons of equity release

Some of the disadvantages of equity release include compound interest on the loans, getting less than the value of your home, losing your entitlement to means-tested benefits as well as having to pay significant upfront costs to set up the product. We discuss these in more detail below.

Lifetime mortgages mean compound interest for life

A lifetime mortgage is a loan secured against your home, and like most loans, it comes with interest. However, because you don't pay off this loan, interest accrues year on year and compounds over time. This can result in a significant debt which will need to be repaid when your home is sold after you die or move into care.

The table below shows the impact of compound interest. It assumes you've borrowed £75,000 at an interest rate of around 6% (which is the current average interest rate for lifetime mortgages).

Year	Compound interest at approx. 6%
0	£75,000
5	£100,366.92
10	£134,313.58
15	£179,741.86
20	£240,535.16

All equity release products reduce your estate, but not paying any of the interest can reduce it dramatically. Compound interest means a £75,000 loan could cost you an additional £165,000 over 20 years depending on the interest rate.

One way to counteract this is by paying some or all of the interest owed on the loan. In effect, it's treating your lifetime mortgage product like an interest-only mortgage. If you choose to pay off all the interest, your beneficiaries will only need to repay the original loan amount when they sell the home. Or, if they have the means to do so, they can repay the money owed without selling the home and keep it in the family.

Home reversion plans only pay 20% to 60% of the value of your home

A home reversion plan is a type of equity release where you sell a part of your home to the home reversion provider. The home reversion provider is then paid from the house sale proceeds after you die or move into care. You get to continue living in your home "rent-free" despite selling a portion off.

However, there is a catch; you will typically only be paid 20% to 60% of the value of your home (proportional to the share of the property you're selling). As such, you're still indirectly paying for the privilege of living in your home because you don't get the full value of your home.

The money is tax-free but it counts towards your income for benefits purposes

If you are on any means-tested benefits, a payout from an equity release product can mean that your benefits are halted. The payout will be tax free but it will count towards your assets for benefits purposes. Some of the benefits that could be affected by an equity release product include:

• Universal credit
• Council tax discounts
• Pension credit (paid to some state pension recipients)

Your state pension itself will not be impacted because it's not a means-tested benefit.

There are significant upfront costs to consider

Setting up an equity release product involves certain upfront and ongoing costs which you will need to budget for. These include:

• Product set-up fees - The product you choose will typically have arrangement fees. You will also need to budget for solicitor fees.
• Mandatory financial advice - It's an FCA requirement to get advice from an equity release advisor before you take out a product. This is so you understand the implications of the product.
• Interest (optional) - If you opt for a lifetime mortgage, your loan will accrue interest for as long as you continue living in your home. This will compound overtime, potentially resulting in a large bill that will need to be paid from the sale of the property. To leave a larger inheritance for your family, you could opt to repay the interest.

Is equity release right for you?

Equity release can be right for some people in certain circumstances. If, for example, you don't want to downsize and you don't want to remortgage or take out other loans, releasing equity can be one way to boost your retirement income. It may be particularly attractive for those who don't wish to leave an inheritance to family members. That being said, it's not right for everyone and there are often other alternatives to consider before going down this route. It is a significant financial decision which should be considered carefully.

If you're unsure whether equity release is right for you, we suggest you seek financial advice before you look into products. If you have further questions about equity release, you can book a free, no obligation equity release consultation via our website.

Common questions about equity release

Below, we outline some of the common questions people ask about the pros and cons of equity release to help you decide whether it's right for you. Many people are worried about the downsides of equity release and we discuss issues like budgeting for setup fees, the pitfalls of negative equity and how to deal with the compound interest on lifetime mortgages. We also discuss possible alternatives to equity release.

What is the downside of equity release?

One of the main downsides of equity release is the compounding interest you'll face on lifetime mortgages. The interest will add up for as long as you live in the property and until the loan is paid off. This can result in hundreds of thousands of pounds added to your debt in interest depending on your initial loan, how long you've held the loan and the rate you secure. However, as we have discussed earlier in this article, there are ways to counteract this by paying off some or all of the interest and treating the product as an interest-only mortgage.

Another significant downside of equity release is the fact it could impact your entitlement to means-tested benefits. While the money you receive from your equity release will be tax free, the cash will still count towards your assets when you're assessed for some benefits, such as universal income and pension credit.

Is there a better alternative to equity release?

In some cases, alternatives to equity release such as downsizing and remortgaging could work better for your circumstances. For example, if you have a large family home where you raised your children who have since left, you might not need all the space in retirement. Downsizing to a smaller property can mean freeing up some cash while owning your home outright so you can pass it on to your family when you die.

Remortgaging could also be an option; remortgaging is when you borrow more money against your home. For example, if you want to keep living in your home but are planning an extension, a remortgage can help fund your project. You will need to repay the loan you have taken out including the accrued interest. As such, this is only appropriate if you need a lump sum now but have the means to pay it off in instalments further down the line.

What are the catches with equity release?

Equity release does come with a catch; you need to budget for set-up fees as part of the process. These include solicitor fees and additional product fees for the equity release product itself. Many of these costs are similar to what you would expect to pay if you were taking out a new mortgage. You will also need to speak to a financial advisor which will could come at an additional cost. In some cases, you'll be able to add some of the fees to your equity release loan, however, this will mean a larger loan and more interest to repay. If you have further questions about the costs of equity release, you can speak to an independent equity release expert by booking a free, no obligation equity release consultation via our website.

What is the downfall of equity release?

One of the main downfalls of equity release is the potential for falling into negative equity. When you release equity using a lifetime mortgage, you commit to repaying the loan and any interest accrued out of your estate when you die. Typically, house prices go up over time which means that when the time comes, your home will sell for more than what you owe. The lender will take what they're owed from the sale, and the remainder of the cash will be given to your beneficiaries.

But in the unlikely event that your home falls in value or the money from the sale can't cover the loan, your estate will find itself in negative equity. The good news is that the vast majority of equity release products have a "no negative equity" guarantee. This means that the lender can't claim the remainder of what they're owed from the rest of your estate even if the loan isn't covered by the sale of the property. As such, there is no risk of leaving your beneficiaries "in debt". However, you also won't leave any part of your home to your beneficiaries as all the money will go towards covering the loan.