10 January 2024

People today are living and working longer than their predecessors. So, we have more options to access the savings and investments made over our lifetimes and more control over how we enjoy the money we’ve saved.

But many of us forget that we’re sitting on our largest single investment: our homes. Lots of homes have grown greatly in value, creating a generational rise in property wealth. That’s where lifetime mortgages and other kinds of equity release come in. They can be a great way of releasing cash that’s tied up in your home without having to sell up and downsize.

So is releasing equity a good idea for you? Well, it depends on your financial goals and circumstances. Hopefully this article will give you some food for thought. It might also be worth reading our articles on:

They’ll help you begin your equity release journey. If they spark your interest and you want to get the full truth about equity release, you’ll need to speak to an independent financial adviser (IFA). There are two main reasons for that. First of all, they’ll help you see if equity release is a good thing for you. And secondly, you can only take out equity release products through an IFA.

So is equity release a good idea? Well, let’s start finding out…      

Pros and cons of equity release

Equity release isn't right for everyone. Here are some equity release pros and cons to consider:

 

The pros of equity release The cons of equity release
You get tax-free cash...
When you release equity, you can choose a product that gives you a lump sum in one go, releases your money as a series of smaller sums when it suits you or gives you a combination of both. 
The interest can build up quickly…
If you’ve gone for an LTM and choose not to make monthly interest payments, any unpaid interest can rapidly build up.

...to spend how you want
You can use the money you release for home improvements, helping children buy their first property or increase your income in retirement. It’s up to you.

…and LTM interest rates can be quite high
LTM rates rise with traditional mortgage rates and are usually higher than them. It’s always worth checking for other, cheaper borrowing options.

You can choose to pay nothing…
If you go for a traditional LTM you don’t have to pay any money back until the last borrower dies or moves permanently into long term care. And with home reversion there’s nothing to pay back.

You’ll have a smaller inheritance to leave behind…
Releasing equity will reduce how much you can leave as an inheritance. With LTMs you can take out inheritance protection, but if you do you won’t be able to borrow as much.

...or make flexible repayments
If you go for an LTM, you can choose to pay some or all of your interest, or even repay some or all of your original loan.

…and your beneficiaries might have to pay inheritance tax
If you gift the money, the recipient may need to pay inheritance tax if you die within seven years of giving it to them.

You can stay in your home…
With equity release, you don't need to downsize and can stay in your home until you die for as long as you want to.

There could be an early repayment charge on your LTM…
If you decide to repay some or all of your LTM loan early, there may be an early repayment charge.

...or you can move house
So long as your provider approves the new property you’re moving to.

…or on your existing mortgage
You may have to pay an early repayment charge to your existing lender as you set up your new equity release product.

You’ll usually have a No Negative Equity Guarantee...
With most LTMs, you'll never have to repay more than the value of your home when it is sold - even if that's less than the amount owed.

And equity release could affect means-tested state benefits 
Any money that comes in from equity release could impact your entitlement to any means-tested benefits you’re getting.

…and you could get inheritance protection
If you go for an LTM and your provider offers an inheritance protection option, you can safeguard part of the value of your home and pass it on to your loved ones.

 

 

What are the different types of equity release?

There are two different types of equity release product:

An LTM is a loan you take out against the value of your home. With home reversion, you sell some of your home to your provider. With both types of equity release, you can stay in your home until you die or move into long term care.

Is equity release safe?

As we said above, you can only take out equity release products through an IFA. They’ll help you feel safe by taking you through your chosen product’s pros and cons. Equity release has to be the right choice for you. If you don’t have an adviser, you can find one at Unbiased.

There will be some very important issues to be aware of when you’re seeing if equity release is a good idea for you. For example, if you take out a product like our Payment Term Lifetime Mortgage, your house might be repossessed if you can’t make your interest payments during its Payment Term. And as we’ve said above, any equity release product can cut down the amount of money you can leave to your loved ones.

How does equity release affect inheritance tax?

How generous can you be when it comes to gifting money to family members? How does inheriting a house with equity release affect inheritance tax? We cover these questions and help you understand how gifting money to family, equity release and inheritance tax works.

Tips on what to ask your adviser about equity release

How much can I get and what are the interest rates?

The amount you can get depends on your age, the value of your home and the type of product you choose.

If you go for a lifetime mortgage it will have a fixed interest rate for the duration of the loan. Interest rates vary between lenders and plans, and they can affect how much you owe in the future. Your IFA will compare different options and share projections of how your debt will grow over time.

What are the fees and charges involved?

Lifetime mortgage fees and charges can include arrangement fees, valuation fees, legal fees, advice fees and early repayment charges. Ask your IFA to explain what fees you will have to pay and when, and how they could affect the total cost of your plan.

What are the implications for my tax, benefits and inheritance?

Equity release can affect your eligibility for means-tested benefits and the amount of inheritance you can leave to your beneficiaries. Ask your IFA to assess how taking out equity release will impact your personal circumstances and help you plan for any negative effects.

What are the safeguards and guarantees?

Equity release plans often come with safeguards and guarantees, like a No Negative Equity Guarantee that ensures that you’ll never owe more than the value of your home. Ask your IFA to confirm that the plan you choose meets the standards set by the Equity Release Council, the industry body that regulates equity release providers.

How can I change or end my plan in the future?

Equity release is a long-term commitment, but your circumstances may change over time. You may want to move house, repay some or all of your debt, or add or remove someone from your plan. Ask your adviser what flexibility and options you have to change or end your plan in the future, and what the consequences and costs would be.

 

Alternatives to equity release

If you find yourself asking questions like: “Is equity release worth it?” or: “How safe is equity release?”, or if you’ve decided that the answer to: “Is equity a release a good idea?” is in fact no, don’t forget that there are other ways you can access cash from your home.

They include downsizing, using savings or investments or taking out a different type of loan. We have articles on some of them:

Any one of them might suit your needs better. Your adviser will explore  the possible alternatives with you and help you weigh up the pros and cons of each one.

 

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