Pros and Cons of Equity Release
A record-breaking number of equity release plans were taken out by homeowners aged 55 plus this year.
According to the latest figures released by the Equity Release Council, 13,452 new equity release plans were taken out between July and September. This marks the first time new equity release customers have surpassed 13,000, smashing the previous record of 12,891 from October to December 2018. This is also an impressive 8% increase from the 12,485 plans which were taken out this April to June.
To read the full report, follow this link: Q3 2022 equity release market statistics | Equity Release Council
With interest in equity release on the rise again, we at Sandstone have put together a quick overview of the main pros and cons of equity release to keep you informed. As always, we recommend you speak to a financial adviser before making a decision.
Equity release is a type of mortgage for over 55s that lets you release equity (cash) from your home.
Lifetime mortgages are the most common equity release plan. This is a loan secured against your property that has to be repaid from its sale when you die, or if you have to move permanently into a care home.
You can also get home reversion plans. This is when you sell all or part of your home in return for a cash lump sum, a regular income, or both. You can carry on living in your home rent-free until you die or move out, but your home, or the part of it you sell, will belong to someone else. For the sake of this blog, we’ll be focusing on lifetime mortgages.
Lifetime mortgages can also be split into two: lump sum and drawdown lifetime mortgages.
Drawdown mortgages, where you take cash up to an agreed amount as and when you need it, with interest only added to money you’ve drawn down, is traditionally the most popular form of lifetime mortgage.
However, for the first time since the beginning of 2009, lump sum lifetime mortgages, where you take out the cash in one go, were more popular than the usual favourite, drawdown plans.
Between April and June 2022, 54% of customers opted for a lump sum plan. A percentage the cost-of-living crisis no doubt had a hand in.
What are the pros?
- Financial freedom and flexibility – If you’re retiring entirely on your pension fund, or you have other financial constraints, with equity release you could finance your post-retirement lifestyle without worrying about staying financially afloat.
- Ownership – If you’re on a lifetime mortgage plan, you get to take advantage of the “sale” of your home without giving up home ownership.
- Moving property – As long as you choose a lender that lets you and it’s to a suitable property, you can move into a new home. You can also take out a plan with downsizing protection.
- Tax-free – The money you release from your property is completely tax-free (as it’s a loan not a form of income).
- No negative equity guarantee – Most lenders offer this. It ensures the lender won’t take more than the house is worth, meaning there will be no debt to take from your estate when you pass away.
- Repayment – You don’t have to repay the loan until you pass away or move out of your home into long-term care. But if you wish to pay some of it off early, there are flexible repayment options available.
- Inheritance – Equity release can be a way for you to give your family a cash gift. It doesn’t count for inheritance, so they won’t need to pay inheritance tax, as long as you survive seven years after gifting it.
- Credit score – You don’t need a good credit score to apply for an equity release plan. This is because you’re not required to make payment during the term.
- Funding – The money you release can go towards paying off an existing mortgage, funding home improvements, boosting your retirement income, a holiday or any other large purchase, and helping your kid get on the property ladder.
What are the cons?
- Devalue – Equity release diminishes the value of your estate since you’ll be giving up part of what you own and committing it to repay a loan in the future.
- Means-tested benefits – Releasing equity may impact your entitlement to means-tested state benefits, including pension credit, savings credit, and council tax benefits.
- Ownership – If you’re on a home reversion plan, you’ll essentially be giving up your home even if you continue to live in it. The third-party involved will become the new homeowners.
- Inheritance – The amount of the inheritance you can leave behind will be reduced, and you can’t leave your home as inheritance.
- High interest – Interest on a lifetime mortgage is calculated daily and added to the amount you already owe, meaning it also increases daily, reducing the equity left in your home.
- Other fees – You could be subject to Early Repayment charges, arrangement fees and other set up fees.
- Loans – If you plan to take out another loan, you won’t be able to use your house as security.
The equity release market saw 25,519 active customers between July and September this year (Property Industry Eye). If you’re thinking about joining the thousands of people turning to equity release, make sure you fully understand the benefits and risks. And remember, you should seek professional financial advice before making a decision.
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