What Are The Pros and Cons Of Equity Release?

After retirement, older homeowners face the challenge of finding an income other than their retirement fund. The UK’s economic forecast, as detailed in a KPMG report, highlights a scenario that appears fragile and susceptible to external shocks. As a result, people are gearing themselves for the worst to come – especially the elderly. 

As a homeowner in the UK, you might be contemplating equity release, questioning its benefits, and how to safely navigate its potential pitfalls. Equity release allows individuals over 55 to access the cash tied up in their home, offering a financial boost without the need to relocate. 

While it presents a tax-free financial solution and increased flexibility, it also carries significant considerations such as the accumulation of compound interest. This can diminish the inheritance for your heirs, and the potential impact on means-tested benefits. It’s imperative to seek professional advice specialising in equity release, ensuring you’re making an informed decision that aligns with your long-term financial goals. 

So, is equity release a good idea? This article explains the details of equity release, the risks, and how to avoid these risks when taking out an equity release. 

What is an Equity Release?

Equity release refers to a way to help boost a homeowner’s finances in later life by unlocking some of their home’s value. This enables individuals to access a part of their property’s equity as tax-free cash, all while retaining the right to live in their home.

Depending on the form of equity release you choose, you can take out equity release money through the following methods: 

  • as one lump sum;

  • in staggered, ongoing amounts;

  • as a combination of the two.

What are the Basics of Equity Release in the UK, and How Does It Work?

An equity release is a type of financial arrangement for homeowners in the UK, typically ages 55 and older. Your home equity is defined as the share that you own outright. Your property’s equity value is found by subtracting your outstanding mortgage from the property’s market value.

Say the value of your property is £92k, and you still have a total mortgage balance owed on the property at around £10k. Your total equity value would be at £82k.

There are two different types of equity release available in the UK: lifetime mortgages and home reversion plans. Both are different in terms of repayment arrangements and interest rates. To find out the best equity release plan for you, keep reading below.

Lifetime Mortgage

A lifetime mortgage is a common type of equity release, similar to a traditional mortgage. It’s a type of loan secured against your home. The money owed doesn’t usually need to be repaid until a property owner dies or moves into residential care permanently.

In the event of the passing of the property owner, your home will be sold by the executor of your estate. The proceeds will then go to payments for the equity release plan, as well as to payment for agent and solicitor fees. The remaining money will be paid to the beneficiaries named in the will of the homeowner.

Equity release service providers usually provide a welcome pack. This pack contains plenty of key details. Details include a plan reference number. Beneficiaries or executors should be able to quote this number when talking to the provider. Depending on the arrangement, you can set up an equity release plan in various ways, even without the involvement of selling your home.

Home Reversion Plan

With this equity release scheme, you can sell a part of your property while continuing to live in it or sell the whole house. The equity release company receives a share of the sale proceeds after the passing of the homeowner or a move into permanent care. It’s important to recognise that these companies typically do not offer the full market rate for the property share they acquire. Doing so could considerably decrease the value of a homeowner’s estate if they die after taking out equity. 

In the case of a joint equity release plan, the documentation should include both individuals’ names. Doing so ensures the continuity of the residence for the surviving party in the property following the passing of one. The widow or widower may be able to downsize if the provider agrees that the property has enough security for the existing plan.

In cases where the plan is under one name, the surviving partner is required to vacate the property. After the partner has vacated the property, only then executors of the will can facilitate the sale of the property, settling the outstanding debt.

What are the Requirements to Get an Equity Release in the UK?

Equity release providers vary in their requirements and eligibility. Here are some of the requirements to check if you are eligible for equity release: 

  • Age. Equity release providers require a minimum and maximum age for property owners to meet. The typical minimum age to qualify is 55 years old.

  • Property Value. The property should meet the minimum value set by the provider.

  • Applicants. The maximum number of applicants is usually around 2.

  • Ownership. The applicant should own the property and should be their main residence.

  • Location. The property’s location should be in the UK.

  • Property Construction. The providers will assess if the property is of ‘standard construction’. This means that they’ll be assessing the main material of your property. However, other construction types may be acceptable to other lenders.

For an estimate of how much equity you’d get, here’s an easy-to-follow equity release calculator.

The Pros and Cons of Equity Release in the UK

Getting an equity release might be the right decision for you. However, considering equity release pros and cons is vital. While the money you gain from the equity release can significantly benefit your quality of life, it is also essential to understand its potential setbacks. Here are some of the benefits and pitfalls of equity release you should consider.

Advantages of Equity Release

There are various benefits of equity release. Here are some of them:

Extra Income During Retirement 

An equity release provides a way for homeowners to unlock the value tied up in their property. By doing so, homeowners can now access potential sources of additional income during retirement. Especially with the current market and rising commodity prices, it won’t hurt to have something extra for the rainy days.

Lump Sum or Regular Payments

Homeowners can choose to receive the amount of equity through regular payments or a lump sum. Equity release payment methods provide flexibility to meet your specific financial needs whether you’re using the money for home improvements, debt consolidation, or other expenses.

Tax-Free Proceeds

In the UK, equity release is typically tax-free. This advantage makes equity releases attractive for those seeking additional funds without fearing tax implications of equity release.

Staying in Your Property

One of the primary pros of an equity release is the ability to remain in your home for the rest of your life, even after the equity is released. If you’re a homeowner with an emotional attachment to your home, this type of financial arrangement is ideal.

No Monthly Repayments

Unlike any other loan type, equity release doesn’t require monthly repayments. Most equity release products do not require homeowners’ monthly repayments. Equity releases allow homeowners to access funds without the burden of financial commitments.

Protection Against Negative Equity

A negative equity happens when you owe more money on a loan.

In this context, a negative equity only happens to homeowners who have a mortgage on their property. If the housing market in the UK experiences a decline, property values may decrease. This can lead to situations where a homeowner owes more on their mortgage than the home is currently worth.

The good thing about most equity release products in the UK is that they protect homeowners against negative equity.

Some release plans come with equity guarantees that protect against negative equity. Thus, ensuring that the debt will never exceed the value of the property. Ultimately providing peace of mind for both homeowners, the equity release provider, and their beneficiaries.

Disadvantages of Equity Release

Getting an equity release can also have its cons. Seek help from a professional equity release adviser and assess whether equity release is right for you. Here are some of the risks and pitfalls of equity release.

Lifetime Mortgage Interest Charges

Most lifetime mortgages come with interest charges. These interest charges add up to your equity release loan. Choosing not to pay off the interest each month increases the amount you must repay at the plan’s end. This could result in owing the whole value of your home to the provider.

In some cases, you might owe the full value of your home to the provider. But it won’t exceed its worth when sold following your passing or entry into long-term care.

Missing Out on Means-Tested Benefits

Getting a lump sum might impact a homeowner’s access to benefits. You might not be eligible for a Pension Credit, Savings Credit, or even a Council Tax Reduction. These mean-tested benefits can be crucial for covering living expenses. This effect could happen when you take out the plan or in the future when you may need these benefits.

Leaving a Smaller Inheritance for Your Family

Signing up for equity release means most of your property’s value will likely go toward repaying the provider if you pass or enter long-term care. If other funds are available, a lifetime mortgage can be repaid with them. This could result in your relatives receiving a smaller inheritance than anticipated.

Your House Can No Longer Serve as Collateral for Future Loans

While you’re on an equity release plan, you can’t use your home as collateral for more loans. However, if there’s more available in your home, you may release equity later with your current provider.

Is it Safe to Take an Equity Release?

Taking out an equity release loan is relatively safe. However, the entire equity release process is riddled with legal jargons. It’s easy to get lost in the process of applying for an equity release. Hence, a regulating body is needed.

There are governing bodies that regulate an equity release service provider. The Financial Services Compensation Scheme (FSCS) provides protection for consumers in the equity release market.

Lenders who offer equity release products must be authorised by the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA). They are also required to pay an annual fee to the Financial Services Compensation Scheme (FSCS).

This annual payment ensures a level of insurance for their customer’s money if they take out an equity release product. The compensation depends and can reach up to £85,000 – if and only if the company fails.

Also, reputable and trusted providers of equity release are members of the Equity Release Council (ERC). The ERC is an organisation that safeguards consumers with measures against negative equity guarantee. Ensuring you won’t owe more than your home’s value.

They also take charge of the necessity to obtain professional financial and legal advice before opting for equity release. The ERC sets limitations on interest rates for lifetime mortgages, and security of tenure, preventing forced eviction from your home.

The Importance of Seeking Legal Counsel

According to the ERC, legal counsel is now mandatory for equity release applicants. The purpose of seeking legal counsel or equity release specialist is to educate and ensure applicants are fully advised on the risks and obligations attached to taking an equity release.

Seeking legal counsel allows you to have a deeper understanding of the intricacies of an equity release. A qualified solicitor’s role is to ensure you comprehend the product, the legal responsibilities, and the contract.

This legal requirement is for your protection. The solicitor ensures you do not enter into a legally binding agreement without full knowledge of its consequences. Legal counsel also prevents you from going through any undue pressure from another party or the equity release provider.

In Summary, Is Equity Release a Good Idea?

While this guide offers an overview of the advantages and disadvantages of equity release, it’s crucial to arm yourself with as much knowledge as possible. For those who find themselves in a particularly challenging situation, further insights and guidance are available.

Many people may use equity release for the wrong reasons, which is why it’s incredibly important to consider the pros and cons of whether this is the right choice for you.

Explore more from the Sandstone Legal blog: Mortgage Prisoners

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.

This content is for informational purposes only and does not constitute legal, financial or professional advice. The information provided is of a general nature and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances and is not intended to be relied upon by you in making (or refraining from making) any specific decisions.

This site may contain links to third party websites.  We are not responsible for and have no liability for the privacy or other practices of any such third party.  We recommend that you review the privacy policies of each website you visit.


This content is for informational purposes only and does not constitute legal, financial or professional advice. The information provided is of a general nature and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances and is not intended to be relied upon by you in making (or refraining from making) any specific decisions.This site may contain links to third party websites. We are not responsible for and have no liability for the privacy or other practices of any such third party. We recommend that you review the privacy policies of each website you visit.