The pros and cons of equity release

You might like the idea of freeing up tax-free cash from your home. But before you start, you should weigh up the pros and cons of equity release.

What are the pros of equity release?

A lifetime mortgage is the most popular form of equity release. It’s a loan secured against your home. Here are some of the benefits:

• You can use the cash for almost anything. This could be to help cover the cost of home repairs or a dream holiday. You could also gift money to loved ones.
• 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. This means you won’t have to sell your current property to move to a smaller, less expensive one. And you won’t have the stress and expense of moving.
• Your monthly costs won’t go up. You don't have to repay the equity release loan or interest until you (or both of you if borrowing jointly) die or move into permanent long-term care. Unless you choose to, no regular payments are required. However, there are some initial costs to set up the plan. These may include advice, valuation and legal fees.
• You can take money out of your home when you need it. Some plans have a ‘drawdown’ feature. This is where you agree a total amount of equity you can access, but get to release it in smaller amounts when you need it. This can mean less interest in the long run, as lifetime mortgage interest only starts being applied once the funds are released.
• You’ll never owe more than the value of your home. Providers who are part 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 owe more than your home's value when it's sold. This follows death or a move into long-term care. Find out more about the safeguards that protect equity release customers.
• You may be able to reduce your family's future tax bill. Inheritance tax (IHT) rules can be complex. Gifting equity release funds to family could mean they pay less IHT in the future. But gifts can also be subject to IHT. It’s best to find out more at gov.uk.

What are the cons of equity release?

As well as the benefits above, equity release has some potential risks:

• Lifetime mortgage interest added to your debt. Monthly interest is added to your lifetime mortgage loan. On a lifetime mortgage, interest is charged on a compound basis, which means interest is charged on the original loan plus all the interest that's already been added. If you choose to not repay all the interest each month, the amount owed will have increased at the end of the term. This can mean that you, or your loved ones could owe the whole value of your home to the provider. But you will never owe more that it sells for, following death or entry into long-term care.
• You could lose some means-tested state benefits. If you take the money as a lump sum, you may not be eligible for some state benefits. These could include Pension Credit, Savings Credit and Council Tax Reduction. Losing them could mean you lose money you rely on.
• Your beneficiaries will get a smaller inheritance. Equity release will reduce the value of your estate. 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 extra fees. Depending on the provider, you may need to pay set-up fees to take out equity release. And if you want to end your equity release plan early, you may face an early repayment charge. Find out more about the costs of equity release.
• You can't take out more loans against your home. Once you have an equity release plan, you can't use your home to secure any more loans. But you might be able to release more equity with your provider in the future.

When you’re thinking about equity release, you should get expert advice. You could talk to the team at Saga Equity Release. Provided by HUB Financial Solutions Limited, our service can help you decide if equity release is right for you.

You’ll only need to pay an advice fee of £799 if you take out a Saga Lifetime Mortgage. To be eligible, you must be 55 or over with a UK home worth at least £70,000.