The pros and cons of equity release

Understand the advantages and disadvantages of equity release

Freeing up tax-free cash from your home without having to move is an appealing idea, but before you start you should weigh up the pros and cons of equity release.

What are the advantages of equity release?

Lifetime mortgages, the most popular form of equity release, which is a loan secured against your home, could have the following advantages:

• You can use the tax-free cash for almost anything you like. You can use the cash for one-off expenses such as home improvements or a holiday of a lifetime, or to help relatives out financially.
• You can stay in your home for life. Taking money out of your home via an equity release plan is often seen as an alternative to downsizing – selling your current property to move to a smaller, less expensive one, and using the price difference to bolster your pension income. Equity release means you can stay put and don’t have to face the stress and expense of moving.
• Your monthly outgoings won’t increase. You don’t have to repay the money unlocked by equity release or the interest on it until you (or both of you if borrowing jointly) move into permanent long-term care or die. Until then, unless you choose to make monthly interest payments, the only costs you will have to pay will be for setting up your plan, such as valuation, legal and advice fees.
• You can take money out of your home when you need it. Some plans have a “drawdown” feature, which means that you agree a total amount of equity that can be released from your home, but only take out the money in smaller amounts as you need it. With a lifetime mortgage, interest is compounded and only charged on the cash you’ve released. As interest only starts to apply when money is taken, releasing money only as and when you need may result in lower overall costs than a lump sum release, depending on the interest rates applied and frequency of withdrawls.
• You’ll never owe more money than the value of your home. Providers who are members of the Equity Release Council offer a ‘no negativity equity’ guarantee on lifetime mortgages. This means that you, your family or your estate will never have to pay back more than your home is worth once it is sold following death or moving into long-term care. Find out more about the safeguards that protect equity release customers.
• You may be able to reduce the amount of inheritance tax your family needs to pay. Inheritance tax rules are very complex, but gifting cash you’ve released from your home before you die may help your family more in the present as well as potentially resulting in them paying less inheritance tax at a later date. You can find more details on the www.gov.uk website. Gifting money can also be subject to inheritance tax so it's important that you know the details.

The disadvantages of equity release

You also need to be aware of these disadvantages as you consider the pros and cons of equity release:

• Lifetime mortgage interest added to your debt. Monthly interest is added to your equity release loan, and if you choose not to repay all of the interest each month, this increases the amount that needs to be repaid at the end of the plan. In some cases, this can mean that you or your beneficiaries could end up owing the whole value of your home to the provider, but never more than it sells for following death or entry into permanent long-term care.
• You could miss out on some means-tested state benefits. If you take the money as a lump sum, this may affect your eligibility for some state benefits, and that could take away money that you rely on for living expenses. Pension Credit, Savings Credit or even Council Tax Reduction could be affected, when you take out a plan, or at some point in the future when you may need them.
• Your beneficiaries will get a smaller inheritance. If you take out an equity release plan, it is probable that at least some of the value of your home will have to go to repay the provider when you die or move into permanent long-term care, although a lifetime mortgage can be repaid with other funds if they are available.
• You may face additional fees. You may need to pay some initial set up fees to take out equity release, depending on the provider. Also, if you wanted to end your equity release plan early, you may have an early repayment charge to pay. Find out more about the costs of equity release on our important information page.
• You won’t be able to take out another loan against your home. Once you have an equity release plan in place, you won’t be able to use your home as security for any additional loans. However you might be able to release further equity at a later date with your existing provider if there is more available in your home.

You should take professional advice to make sure you fully understand the pros and cons of equity release and whether it’s the right solution for you.

Saga Equity Release, provided by HUB Financial Solutions Limited, is a no-obligation, no-pressure service dedicated to finding out if equity release is right for you. You’ll only need to pay an advice fee of £799 if you decide to proceed and take out a Saga Lifetime Mortgage.

Equity release is for those aged 55 or over with a UK home worth at least £70,000. The Saga Equity Release team will help you find out whether it could be right for you.