Equity release can help you to unlock some of the wealth tied up in your property without you having to sell your home. It’s become a popular option for many homeowners aged 55 and over, who last year released a record £4.4 billion in property wealth through equity release.

Here, we run through the benefits of equity release, but it’s important to be aware of the possible downsides too before deciding whether it’s the right option for you.

Benefits of equity release

The specific benefits of equity release will depend on the plan you choose and your personal circumstances. There are two main types of equity release, lifetime mortgages, which are the most popular, and home reversion plans. However, the general benefits of equity release include:

Releasing money from your home tax-free

UK property prices have risen steadily over recent years, which means many people have wealth tied up in their property. One of the biggest benefits of equity release is that you can release a portion of this money tied up in your property, tax-free, without having to sell your home.

Depending on the type of plan you choose and your personal circumstances, you might be able to release from 30% to 60 % of your home’s value. You can either take this money as a lump sum, a regular income or a combination of the two, and you can do as you wish with the money, such as pay off remaining debts or increase your income.

Some equity release plans offer a drawdown function that enables you to release a lump sum of money from your property, but rather than taking the full sum straight away, you take a portion of it now and leave the rest in a cash reserve to draw down later.

You don’t make any monthly repayments

You won’t usually need to repay the money you’ve released from your property, or any interest, until you die or you move into long term care. The money will then be repaid when the house is sold which obviously has an impact on any inheritance you plan to leave your loved ones, but it might also mean that your estate won’t need to pay as much, or any, inheritance tax.

You can carry on living in your own home

Many of us want to stay in our homes for as long as possible, and by releasing equity from your home you can carry on living in your own home until you die or move into long-term care.

Often the money people release from their homes helps to increase their income stream, but it might also be used to fund the cost of care or/and any alterations that are needed to your home if your care needs change.

You won’t pass on debt to your loved ones

As long as you take out a product from an equity release provider that’s a member of the Equity Release Council (the trade body for the equity release sector), your equity release plan will come with a ‘no negative equity’ guarantee. This means that neither you nor your family will have to pay back more than your house is worth when you move into long term care or die.

You might still be able to move in the future

Your plans may change in the future even if you’re not wanting to move now, and it may be possible to take out an equity release that enables you to move, or downsize without penalty.

Some Lifetime mortgages allow you to move home and ‘port’ your equity release plan to another property. You might also be able to get ‘downsizing protection’ from your equity release provider, so you can repay the plan in full without paying an early repayment charge. However, this depends on your equity release provider’s rules.

Downsides of equity release

There are a number of benefits to equity release, but it’s still a significant financial commitment so it’s important to be aware of the potential downsides.

Equity release can be expensive

Equity release rates can be higher than standard mortgage rates, which currently remain low, so if you are looking to access cash from your home, then remortgaging or downsizing could potentially be a cheaper option.

If you take out a lifetime mortgage, the amount you owe can rack up into considerable sums over time, and the longer you live, the more money you will owe. Interest rolled up at just 3% will double the amount you owe after 24 years, for example. You can repay equity release early, but depending on the type of plan and your provider, you might face a hefty early repayment charge (ERC).

If you’ve opted for home reversion, where you sell all or part of your home to the equity release provider, you might also need to consider other charges you might be liable for, such as ground rent.

It’s also important to note that if, after taking out an equity release plan, you decide that it’s not for you, it can be very difficult, expensive, and in some cases impossible to unravel the plan, so it’s not a decision to take lightly.

The amount inherited by loved ones could significantly reduce

For many people, their property makes up a considerable proportion of their estate when they die, and taking out an equity release plan is likely to reduce its value significantly, as the money borrowed will be repaid when you die (or move into care). This makes it really important to inform your family if you’re taking out an equity release plan, and the implications this may have on them.

If you’ve taken out a home reversion equity release plan, your provider will own a portion or all of your property, so you may not be able to leave it to any beneficiaries.

Government benefits might be affected

Releasing equity from your home will provide you with a lump sum which might affect any means-tested benefits you currently receive or might be entitled to in the future. You can read more about how lump sum payments can affect your benefits here.

You won’t usually get market value for your home

If you choose to take out a home reversion equity release plan, then you will usually only receive up to 60% of your property’s market value for the proportion of your home that you sell to the provider, so it may be more financially beneficial for you to downsize or remortgage to release cash from your home. If you’re determined to remain living in your home, you could consider renting out a room to receive some additional income. Find out more in our article Five ways your home could make you money for more ideas.

You need to maintain your home to a certain standard

When you take out an equity release plan, you’ll usually agree to maintain your property to a standard that your lender will set. Even if you don’t think any particular maintenance or repairs are necessary, you’ll need to use income or your savings to pay for these. If you don’t, your provider might carry out the repairs and charge you for them, or add the cost of them to the amount you owe.

You can read more about the potential risks of equity release in our article Equity release – what are the risks?

Consider getting advice on equity release

If you’re considering equity release, your first step should be to seek advice from a qualified financial advisor. You can find a local financial advisor on VouchedFor, the review website for financial advisors, or Unbiased, which connects users to advisors in their area, or for more information, check out our guides on How to find the right financial advisor for you.

A financial advisor can help you understand the best option for you and recommend a suitable product from a member of the Equity Release Council (ERC). The council has a number of product standards which help safeguard borrowers so it is important that any provider you choose is a member.

Advisors can also be members of the ERC. You can search for an equity release provider that belongs to the ERC here.

If you’re looking for somewhere to start, you can get fee-free expert advice from a Rest Less Mortgages equity release specialist, with no broker fees on application. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.

Have you taken out an equity release plan or are you considering doing so? We’d be interested in hearing from you. You can join the money conversations on the Rest Less community or leave a comment below.

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