Pros and Cons of equity release

Pros and Cons of Equity Release

In recent years equity release has become a very popular option among people of retirement age who own their own property but do not have much money in the bank.  In this article we look at the pros and cons of equity release.

To put it simply, equity release is a method of borrowing money on the total estimated value of your estate so that you are able to enjoy your retirement to the full without having to sell their home or having to scrimp due to lack of funds.

Read on to discover the potential benefits as well as the pitfalls of equity release.

Before we share the tips below, here is a short video that sets out some of the pros and the pitfalls of equity release. We do recommend that you watch this as whilst there are many advantages, there are disadvantages to equity release that you should consider.

Here is a video outlining the pros and cons of equity release.

The Pros of Equity Release

1. There is No Need to Move House

Home owners can receive extracts from the value of their property without having to sell it or move to a smaller property. This means that elderly home owners can enjoy their home right up until their death if they wish.

2. Tax-Free Revenue

The sums that are released on the value of the property are not subject to tax. This can provide an essential form of income.

3. Regular Payments

Most equity release schemes provide regular payments rather than a lump sum. This helps recipients to manage their budget more effectively.

4. No Monthly Payments

Unlike with other types of loans, recipients do not have to worry about keeping track of or struggling to make monthly repayments.

5. Fully Regulated Operators

Most people who offer equity release packages are members of the Equity Release Council and are bond to abide by strict rules and regulations.

One of the most important of these is the no negative equity guarantee, which means that if the value of the property happens to fall below the amount borrowed the property owner will not be asked to make up the difference.

6. Low Interest Rates

The interest rates on equity release loans are usually fixed for the entire duration of the loan and tend to be much lower than the interest rates of most types of traditional loans.

7. Avoidance of Inheritance Tax

People who receive equity release have the option of making cash gifts to their loved ones during their lifetime so that friends and family do not have to pay inheritance tax.

8. No Increase of Monthly Outgoings

Generally speaking, recipients of an equity release loan do not have to repay the money that has been unlocked by equity release or even the interest on the loan until their either die or decide to move into long-term care.

This means that until that point, the equity release plan will not actually cost you anything except from the set-up or advice costs that are generated.

9. Freedom to Spend Finances in Any Way

There is no limit on the ways that recipients can spend their new found cash. Whether they decide to take a well deserved rest by going on a cruise, provide their family with cash or renovate their home, the choice is entirely theirs.

disadvantages of equity release

The cons and pitfalls of Equity Release

1. Less Inheritance for Loved Ones

One of the major pitfalls of equity release is the fact that upon the instance of death, loved ones will not be able to inherit the full value of the property.

2. Difficult to Change Policies

People who wish to quit their equity release policy are likely to find that they are charged an early repayment penalty, which can be rather high.

3. Benefits may be impacted

People who receive certain means-tested benefits such as free eyeglasses, dentistry, pension credit and council tax and pension credit could find that deciding to opt for an equity release policy affects these benefits.

4. Can be Costly to Set Up

There are several different fees incurred in the process of setting up an equity release loan such as the application fee, the valuation fee, the solicitor’s fee and even the cost of seeking advice.

5. Difficulty in Remortgaging Property

People who wish to remortgage their property at a later date are likely to find that their options are rather limited.

6. Potential to miss out on rising house prices

Because the value of the equity release loan is directly linked to the price of the property at the time when the policy is taken out, people who hold this type of policy will not receive extra cash if the value of their property rises.

Because there are so many factors involved, it is essential to consider opting for an equity release policy carefully and take the time to shop around for the best deal.

There are several reputable providers available to choose from and potential clients should read reviews from previous clients and make sure that they read all the small print on the policy before signing.

It is also a good idea to discuss the idea with loved ones and seek their input in order to help avoid disputes in the future.

Infographic with the pros and pitfalls of equity release

You can read more about the cons below the graphic.

Pros and cons if equity release infographic


How Does Equity Release Work

Use the Equity Release Calculator

What is a Lifetime Mortgage

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