The pros and cons of equity release

Chris Torney / 24 August 2016

It’s important to weigh up the advantages and disadvantages of equity release.



Deciding to take out an equity release plan is a big step and it is important that you weigh up the advantages and potential disadvantages of raising extra money in this way. 

What is equity release?

These are the most significant pros and cons:

Advantages

You can stay in your home

Taking money out of your home via an equity release scheme is often seen as an alternative to downsizing – selling your current property, moving to a smaller, less expensive one, and using the difference in price (less moving expenses) to bolster your pension income.

Equity release means you can stay put and don’t have to face the stress and expense of moving.

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Your monthly outgoings won’t increase

In general, you don’t repay the money unlocked by equity release or the interest on it until you move into long-term care or die. Until that point, your equity release plan won’t cost you anything, aside from any set-up or advice costs.

You can use the money however you like

Your equity release windfall can be used for one-off expenses such as home improvements or a holiday of a lifetime, as well as to simply boost your pension income or even help relatives out financially.

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You can take money out of your home when you need it

Some providers now allow customers to use a “drawdown” service, which means they only release money as and when it is needed. 

Interest is only charged on the cash you have released, so this approach helps keep interest bills down.

Disadvantages

Interest charges can mount up

The longer you borrow money through an equity release plan, the longer interest charges have to build up. In some cases, this can mean that at the end of the plan, you or your family could end up owing the whole value of your home to the equity release company.

Reputable providers should offer a “no negative equity guarantee”, which means what customers owe can never exceed the value of their property.

Your family could get a smaller inheritance

If you sign up for equity release, it is inevitable that at least some of the value of your home will have to go to repay the provider when you die or move into care. 

This means your relatives could get a smaller inheritance than they had expected.

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You could miss out on house-price rises

If you use a home reversion equity release plan, you effectively sell some or all of your home to the provider. 

This means you and your family will not benefit from future house-price rises on the portion you have sold.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.