Is Equity Release a Good Thing?

Do You Want to Know if Equity Release Is the Best Option for You?
Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui
Are You Considering Equity Release to Unlock Funds? Is It a Good Idea For You? Discover the Pros & Cons of Equity Release So You Don’t Get Caught.

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Is equity release a good idea in 2022 or just another scam?

With so many fraudsters out there, we check all the facts. No need to worry, we’re here to be your guide.

Through this article, you’ll learn:

  • What’s equity release?
  • What’s the catch with equity release?
  • Is equity release safe?
  • 4 little known truths about equity release
  • What are the pros & cons of equity release?
  • What’s the downside to equity release?
  • How much do you repay on equity release?
  • When is equity release a good idea?
  • Is equity release a con or scandal?
  • Are there any alternatives to equity release?
  • What are the equity release horror stories?
  • Which equity release companies to avoid?
  • Does equity release affect a state pension?
  • Can I sell my house if I have equity release?
  • Is equity release right for you?

Our astute financial experts at SovereignBoss spend time researching the financial markets so we can bring you the facts. 

Read on for more!

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TABLE OF CONTENTS

What’s Equity Release?

Equity release is a term that refers to financial products that you can use to unlock your home’s capital.

Only those over the age of 55 and who’re homeowners are eligible for equity release.

You can utilise either a lifetime mortgage or a home reversion scheme. 

How Does Equity Release Work?

Equity release works by your property being collateral for your loan.

The value you can access using equity release will always be less than the market value of your home.

If you take out a lifetime mortgage, you’ll retain ownership of your home and be able to live in it until you pass on one day. 

With a home reversion scheme, you’ll sell your home for a cash lump sum in return for lifetime tenure.

What Are the Different Types of Equity Release?

The different types of equity release are lifetime mortgages and home reversion plans. 

Lifetime Mortgage

There are 2 main types of lifetime mortgages available, the 1st being a lump-sum lifetime mortgage and the 2nd being a drawdown plan.

A lump-sum lifetime mortgage and a drawdown lifetime mortgage are secured against your home; however, you retain homeownership.

With a lump-sum lifetime mortgage, you’re paid out a tax-free cash amount which will accrue interest.

A drawdown lifetime mortgage pays out a smaller lump-sum upfront followed by installment amounts; alternatively, it pays only regular installments.

Interest repayments on both a lump-sum and drawdown lifetime mortgage are voluntary as interest will be claimed from your estate when your home gets sold. 

The benefit of a drawdown mortgage is that you’re only liable for the interest portion of the actual value paid out, not the total loan approval amount.

It’s also possible to settle a lifetime mortgage if you choose to, whether it’s a lump sum mortgage or a drawdown plan.

Home Reversion

Home reversion plans, in short, involve you selling your property as a whole or a part thereof to a home reversion provider. 

The amount you sell your home or part thereof for will be less than the market value of your property.

You’ll be allowed to stay in your home as a life tenant.

The disadvantages of home reversion plans are that you don’t retain your homeownership. 

Home reversion will detract from your beneficiary’s inheritance one day when you pass on.

When Can I Use Equity Release?

You can use equity release if you’re over 55 years of age and are a homeowner, the home you’re releasing equity from must also be your primary residence.

It’s best to use equity release when you need to access the capital in your home as cash to cover expenses or make your retirement more comfortable.

You must always consult an accredited financial adviser and determine if equity release is your best option.

How Much Can You Borrow With Equity Release?

How much you can borrow with equity release depends on your circumstances.

It’ll always be less than your property’s market value. 

The maximum amount you could be approved for depends entirely from provider to provider and takes your property value and age into account.

Contacting your financial advisor for a quote based on your circumstances is the best way to determine how much you can borrow.

Is Equity Release Safe?

Yes, equity release is safe if you use a provider and adviser accredited by The Equity Release Council. 

Membership will ensure that providers are reputable and that you’re protected against negative equity and unscrupulous advice.

It’s best to follow your financial adviser’s advice on the best plan for you.

What’s the Cost of Equity Release?

The cost of equity release is often around £3,000. 

This covers valuation fees, application costs, and fees to finalise your application, among others.

What Are the Pros and Cons of Equity Release?

Let’s have a look at the pros and cons of equity release

It’s a big commitment, so it’s best to determine if it’s the right option for you.  

What Are the Advantages of Equity Release?

The advantages of equity release are:

  • Gaining access to your home’s capital as cash whilst still being able to live there.
  • Using the money, you get to fund care needs.
  • Being able to consolidate your debt.
  • Funding your children’s college education with the proceeds.
  • Having funds to settle a current mortgage.

What Are the Disadvantages of Equity Release?

The disadvantages of equity release are:

  • You reduce your beneficiary’s inheritance one day.
  • If you make use of home reversion, you no longer own your home.
  • You may only realise as little as 30% of your home’s value with home reversion.
  • If you use home reversion, your home must be vacated quickly after passing away.
  • You’re liable for the interest on your lifetime mortgage.
  • You may not be able to move home if you use home reversion.

Avoiding the Pitfalls of Equity Release

These are the pitfalls of equity release you need to avoid.

You must be aware that you’ll get far less than the market value of your home.

You’ll receive much more if you sell your home or consider downsizing, but then you would still need to pay for a new property to live in.

If you use a lifetime mortgage, especially a lump sum option, you could owe the provider more than your home’s value when you pass on because the interest is compounded. 

You can manage this risk by making interest payments if you choose to.

However, if you can’t do so, you could diminish the inheritance you want to leave to your loved ones when you pass on.

By changing your income situation with equity release, you may change your eligibility for certain means-tested state benefits. 

With a home reversion plan, you may not be able to move home.

It’s always best to take legal and financial advice before signing any contracts or accepting offers.

So, Is Equity Release a Good Idea for Me?

When you decide if equity release is a good idea for you, you’ll have to consider your financial position carefully. 

Always make sure you get the best financial advice and speak to your family before making a decision.

You may want to consider the following:

  • Has a financial advisor told you that equity release is your best option?
  • Can our savings and other forms of income cover your retirement expenses?
  • If a reduction in your beneficiary’s inheritance isn’t a significant concern for you.
  • Is downsizing an option?
  • If consolidating your debt using equity release will change your financial position.

Common Questions

Does Equity Release Affect Inheritance Tax?

Will I be Protected When Using Equity Release?

Are There Taxes or Fees Associated With Equity Release?

What Are the Repayment Terms for Equity Release?

Can I Sell My House if I Have Equity Release?

Why Would You Do Equity Release?

Where Can I Get Equity Release Advice?

Conclusion

While equity release isn’t the solution for everyone, it has fantastic benefits for those who need it. 

Before deciding if equity release is a good idea, consider all your options and get the best financial advice to protect yourself.

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Editorial Note: This content has been independently collected by the SovereignBoss advisor team and is offered on a non-advised basis. Sovereignboss may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.

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