This is not an exhaustive list, but may help guide your thinking.
The benefits or otherwise of taking out equity release on your home will inevitably be different for each person. However, there are some principles that are worth considering before you consider entering into an agreement, that in most cases will be a long term commitment.
Advantages of equity Release
- If you decide to release equity in your home, you can get a tax-free lump sum to pay for a large item such as a car, home improvements or to help a family member. Or, you could decide to withdraw smaller, regular payments to supplement your income, maybe like me until your state pension kicks in. Equity release is therefore an effective way to fund retirement, assuming you can live with the disadvantages or cons listed below.
- Taking a lifetime mortgage doesn’t change anything in terms of ownership of your home you can continue to live in your house until you decide to move to another house, move into permanent residential care or indeed until you die!
- Your interest rate will be fixed for life. This can be a good thing if rates are low – but equally if they are high as of April 2023 then this might be a disadvantage.
- Due to UK financial regulation, you will benefit from a no-negative-equity guarantee – this means that you will never owe more than the value of the property when it is sold.
- The lifetime mortgage is for a fixed amount or % of your home’s value at that point in time and as such you will continue to benefit from any rise in the value of your property assuming of course that the housing market remain positive, and the house rises in value.
- You can still sell your house at a later date and move to another property as equity release is transferable, however, it will be subject to your new home meeting the property suitability criteria applicable at the time.
Disadvantages of Equity Release
- If you release equity from your home, it will reduce the value of your estate and therefore the amount that will go to the people named as beneficiaries in your will. This might or might not be important to you, but it is certainly worth considering, particularly if you decide not to make any payments to cover interest. Remember that if you live for another 20 or 30 years, the amount of interest and therefore the amount of the loan against the property will increase significantly.
- If you choose not to pay off any interest, then it will be added to the loan each year. Therefore, the loan grows and the following year the interest will be higher – this is known as compound interest or compounding. If, however, you decide to pay some or all of the interest accrued for that year, then the loan or capital amount remains the same and doesn’t grow and there is no compounding. Clearly, if you can afford to settle some or all of the interest each year, this is a good thing, particularly if you’re wanting to maximise the amount you’re able to hand on to your loved ones when you die.
- It’s also worth factoring in that receiving a lump sum or indeed taking extra cash to supplement your income, may well reduce your entitlement to means-tested benefits, now or in the future. Also, if you get care at home funded fully or partially by the local council, releasing equity and therefore have more income or funds held in a bank account, they may start charging you or ask you to pay more.
These are a few of the pro’s and con’s of equity release. As I say, this isn’t an exhaustive list, and you should do your own research and maybe seek advice from professionals or family members before you take this important step.
