Is Equity Release A Good Idea?

When you reach your senior years, you may want some extra cash to pay for home improvements or go on that holiday of a lifetime. Additional funds may also be needed to cover unexpected expenses or even to support your cost of living should you not have enough pension or savings.

Equity release could provide the ideal option to fund any of the above and more so long as you own your own home. Furthermore, if your property was purchased many years ago, it is likely worth significantly more than its original purchase price, meaning equity release could give you a generous lump sum to enjoy as you wish. 

However, equity release is a big decision and one which you should discuss with an independent advisor before moving ahead. Before you do so, let’s take a further look at what equity release is, along with the potential advantages and pitfalls to help you make an informed decision. 

Equity Release: An Overview

Equity release is something we’ve discussed a few times here at Retirement Expert. But for those unfamiliar with how equity release works, it involves releasing funds from the value of your property. The money may be paid back in instalments or recouped from your estate when you die, depending on the conditions of your equity release. 

You must own your property and be over 55 to qualify for equity release, with the main types of equity release being a lifetime mortgage or a home reversion. A lifetime mortgage is generally the preferred option for equity release. 

As for the amount of equity release you can get, again this will depend on the provider and your specific circumstances including the value of your property. However, most companies offer between £10,000 and £1,500,000 worth of equity release. 

In exceptional circumstances, some companies offer up to £12,000,000 of equity release. Although most people have an average value home, and require a much smaller amount of equity. 

Equity Release Pros

So what could potentially make equity release a good idea? Here are some of the advantages that could make your decision straightforward. 

≻ You Can Enjoy Your Own Money

It sounds simple enough, but we all know of seniors who prefer to remain conservative with their money, even if it’s to the detriment of their living standards. For some, this could involve living in a home that is in need of significant repair, never going on holiday or struggling to get by. These scenarios are too common yet unnecessary if equity release is a viable option. 

Plus, the stark reality is that once you die, you cannot take any of your money with you. That’s why it’s important you enjoy what you’ve worked hard for while you still can. If you finally have the time to travel now you’re retired, or if you have any ambitions you want to achieve, you only have a limited time to do this before you die. This is the same for all of us, regardless of our age. 

≻ Releasing Equity Could Be More Suitable Versus Taking Out A Loan

Make no mistake that both loans and equity releases will be subject to interest rates. That said, some loan interest rates are astronomical, especially in terms of payday loan companies. If you’re in need of cash and don’t have the savings to cover whatever you’d like to pay for, then equity release may offer lower interest rates. 

Also, for those with a poor credit score or in receipt of benefits, you may not have access to a loan or even an overdraft extension. In which case, equity release could be the only option if the money is needed sooner rather than later. But you will need to carefully work out the total cost to pay back, to ensure that equity release won’t cause a new financial problem later down the line. 

≻ Various Tax Benefits

Equity release is not subject to income tax, and this is one of its main advantages. 

Also, when wanting to give a cash gift equity release can also prove to be the better option tax-wise. That’s because if at least 7 years pass by between the time at which the gift is given and when you die, the money will not be subject to inheritance tax. Plus, you’ll get to see your loved ones enjoy the money, which won’t be the case if you leave the money as an inheritance. 

In addition, equity release can sometimes apply for second properties or buy-to-let properties, and in these cases, capital gains tax wouldn’t apply right away, as the funds are only collected when the properties are sold. 

If reducing your tax is a concern, it’s well worth consulting a tax advisor in addition to an equity advisor to find out how equity release could benefit your estate. 

≻ Can Be Used To Pay For Care Home Fees

As noted in our guide How To Avoid Selling Your Home To Pay For Care, equity release can be used to pay for your care home fees if you’re unable to self-fund. The money will be collected either when you move into a care home or when you die. Compared with being unable to get the care you need, equity release could offer a vital lifeline.

≻ You Don’t Have To Move

Just because you’ve agreed to an equity release, there’s no need to sell your home. The intention is for the money to be collected after you die when you no longer live at the property. Although, if you move into a care home, your home may be sold at this point, unless a qualifying spouse or relative still lives at the property. 

Equity Release Considerations

There are various aspects that could make equity release unsuitable either in the interim or altogether. Being aware of all the potential pitfalls is essential to ensure a sound decision. 

≻ Being Smart With Equity Release

To avoid heavy interest compounds, the general rule with equity release is to release as little as possible as late as possible. Otherwise, you could end up owing a sizable amount even on a small loan especially if the deal is poor. 

This is another reason why you must shop around, taking the time to read the small print and do the calculations before going ahead with equity release. Also, stay well clear of companies who use pressure selling techniques. 

Equity release shouldn’t be the first resort, especially if you have savings you can dip into, or if you’re able to budget to put cash aside instead. 

≻ Releasing Equity Will Reduce Any Inheritance

If you have any dependents who you want to leave money to, any equity you release plus interest will be taken from your estate when you die. While equity release can have inheritance tax benefits, it can also shrink the money pot for those left behind.

Although, as we’ve stressed before here at Retirement Expert, avoiding equity release for the sole purpose of leaving a large inheritance behind generally isn’t wise if the money is badly needed now. For instance, if your quality of life will be poor as a result, equity release would probably be a better option, especially if no other financial solution can be found. 

≻ Downsizing Could Be A Better Option

If you’ve lived in the same home for most of your life, especially if your children have long left the nest, then the chances are your property may now be too big for your needs. Likewise, you may struggle with the stairs now you are older, or even find the neighbourhood less desirable compared with when you first moved in. If any of these aspects resonate, then downsizing rather than releasing equity could prove to be the better and cheaper option. 

Granted, moving is stressful especially in your senior years. However, at some stage, all of your belongings will need to be sorted through anyway. Why leave it until after you’ve gone, especially if downsizing could also help you to avoid the interest rates of equity release? 

If you are going to downsize, the earlier you do it the better to receive your money sooner and to find the most suitable property for your needs without delay. 

≻ Some Equity Release Deals Are Terrible

As with taking out a loan, credit card or mortgage, there will always be providers and indeed individual equity release deals that just don’t make good financial sense. Avoiding poor deals is in your best interests, and can only happen with due diligence. If you rush your decision, you are more likely to end up with a bad deal. 

Read more: Best Equity Release Rates

Equity Release: In Summary

Few things in life are ever straightforward, and it’s fair to say that equity release is right up there too. As a senior considering equity release, you need to be sure the deal you are getting is agreeable with no hidden catches. 

Unless taking out a loan, downsizing, using your savings or budgeting would give you the extra cash you need, equity release could be a viable option. But it’s not something that should ever be a snap decision, seen as it will have lasting consequences for your estate.

We hope you’ve enjoyed this article relating to equity release. Here at Retirement Expert, you’ll find plenty of other free articles relating to all things senior living. Some of our core topics include finance, retiring overseas, personal safety and keeping healthy.

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