Before making a choice, it’s essential to weigh up the pros and cons of equity release. 

Although equity release can provide tax-free cash, it will also reduce your inheritance.

So before you decide to access the value tied up in your property, first consider how this would affect your finances.

Our team of experienced professionals has made a detailed study of the pros and cons of equity release to give you accurate, in-depth information so you can make the best choice for you.

What Are the Pros & Cons of Equity Release?

First, find out what the pros and cons of equity release are before deciding whether it is the right choice for you.

Benefits of Equity Release

Let’s take a closer look at the benefits of choosing equity release. 

Tax-Free Cash 

The biggest pro of equity release is tax-free cash at your disposal to use any way you wish. 

Equity release is a loan that needs to be paid back and therefore you don’t have to pay tax on the cash you receive from it.

Especially if you don’t have significant savings or pensions, equity release gives you access to the money tied up in your property. 

No Need to Move

With equity release, there is no need to move since you can receive cash without having to sell your house. 

No Monthly Repayments

You don’t need to make monthly payments with an equity release plan since the loan only needs to be repaid when the borrower dies or moves into long-term care. 

However, on 31 January 2022, the Equity Release Council released a report that lenders would in future be required to offer borrowers the opportunity to make annual partial repayments on all lifetime mortgage plans.¹

As of 28 March 2022, all lifetime mortgage lenders under the guidance of the Equity Release Council now offer penalty-free partial repayments to their borrowers.

Future Housing Options

Equity release gives you more options for housing in the future.

You can use the money for home improvements so you are more comfortable.

If you wish to downsize later down the road, you could port your equity release plan to another property that meets the criteria of your provider. 

Minimise Inheritance Tax

If you release equity from your home, you essentially reduce the size of your estate, which will minimise inheritance tax.

Your beneficiaries won’t have to pay inheritance tax at all if the equity release has shrunk the value of your estate to less than £325,000.²

Still Leave an Inheritance

You could still leave an inheritance to your loved ones despite reducing the value of your estate with equity release.

In fact, many equity release products include inheritance protection, which means that you can protect part of your property’s equity, specifically to pass on to your family.

The Disadvantages of Equity Release

There are also disadvantages to consider for equity release, which you can explore here in more detail.

Increased Debt 

Your debt will increase with equity release because of the compound interest added on top of the existing interest of your original mortgage.

If you don’t pay back any interest, this means that the debt you owe on your mortgage could add up over time. 

The money from the sale of the property would then be largely or completely used to cover the loan. 

Reduced Equity

Your remaining equity in your home decreases due to accrued interest with a lifetime mortgage or the sale of a portion of your property when you release equity through home reversion. 

It’s crucial to weigh the long-term implications of equity release on your property’s remaining equity and make an informed decision by seeking professional financial advice.

Additional Fees on Top of Compound Interest

Additionally to the compound interest, you might also need to pay set-up and valuation fees. 

Some providers also charge early repayment fees as the lender has calculated their return on investment on your equity release based on how long they expect the loan to run.

Since early repayment charges and other fees can vary between providers and products, you must review these with your advisor or broker before committing to an equity release plan. 

Learn More: Top Equity Release Companies in the UK

Limited Access to Future Borrowing

If you take out an equity release plan, you won’t be able to use your home as collateral for any future loans. 

Your existing provider might let you release further equity later on if there is remaining equity in your property.

Impact on State Benefits

Certain means-test state benefits can be impacted by releasing equity from your property.³

These could include pension credits or council tax reductions.

The lump sum or additional income from equity release could push you above the eligibility threshold for these benefits.

Reduced Inheritance

With equity release, you reduce the inheritance to your heirs because you’ll be converting a portion of your home’s value into cash. 

They’ll inherit the money left over from the sale of the house after the equity release mortgage and the compounded interest is paid back.

Common Questions

In Conclusion

Equity release can provide financial flexibility and a tax-free cash injection for homeowners, however, it also reduces the value of your estate and might impact your eligibility for state benefits. 

That’s why it’s essential to seek professional advice, consider your long-term financial goals, and explore alternative options when considering equity release. 

Weighing up the pros and cons of equity release will help you to make an informed decision that suits your unique circumstances.