What are the advantages and disadvantages of equity release?

retired pension planning

Equity release can make an enormous difference to your finances throughout your retirement.

This can come in several different ways, such as paying off any remaining debts or mortgages you may have while remaining in your home, or freeing up some extra money to travel and enjoy your free time throughout your retirement.

What you do with the money you receive from equity release is entirely up to you, although it isn’t suitable for every individual circumstance. To find out how much equity release you may be entitled to receive, you can use an online equity release calculator.

In the meantime, we have compiled 5 advantages and 5 disadvantages to equity release, with the hope that this article can aid in your decision making going forward.

What are the advantages of equity release?

  1. You don’t have to move home – equity release can allow you to release some of the value from your home, while allowing you to continue to live in your home without having to pay rent on the property.
  2. If you are under a Lifetime Mortgage – a form of equity release that means you can release equity from your home while continuing to live in it – you can either pay interest each month to avoid accumulating a debt, or allow the interest to be added continually to the amount borrowed.
  3. Any money you release from your property is not liable to taxation, meaning you can enjoy the cash freed up from your property without incurring an income tax. This cash you release can be used for anything, ranging from home improvements, supporting loved ones or clearing any debts you may have.
  4. A ‘no negative equity guarantee’, offered by all Equity Release Council approved schemes, ensures that any debt you accumulate during equity release – along with any ongoing interest you might wish to add to the borrowed amount – will never surpass the property’s value in the future beyond your death.
  5. Depending on the plan you choose to go with there are no regular payments to make, meaning you have full control over the payments you make and when you make them – it is entirely up to you.

In addition, with the flexibility of modern equity release schemes, you can either withdraw the money as a tax-free lump sum or as a lump sum with a drawdown option. A drawdown plan allows you to take small amounts at different times, up to a limit, while a lump sum means you have to take the entire amount at once.

What are the disadvantages of equity release?

  1. By choosing to release equity from your property, you are choosing to reduce the value of your estate in order to free up cash for yourself. As a result, the amount of money you are able to pass on to your beneficiaries will therefore, also decrease.
  2. If you decide you want to repay the equity you have released, or if you choose to end the equity release plan early, you may incur financial penalties as a consequence.
  3. Depending on the lifetime mortgage plan you are under, you may be paying the amount borrowed back with compounded interest. This means that over a long term period the amount of money that you owe can accumulate and grow very quickly. Typically, a 4.5pc rate associated with equity release means that any debt you accumulate can double within 16 year period.
  4. Equity release is just one option available if you are considering releasing tax-free cash from the value of your property. For instance, two other alternatives may include downsizing or taking a lodger in to help with payments.
  5. By choosing to release equity from your property, you may lose some entitlement to certain state benefits. These benefits can range from glasses, dentistry, council tax and state pension. As a consequence, if you think equity release could hinder any future benefits you may be due to receive; it is worth checking before making any commitments to a plan.

It is important to remember that equity release isn’t suitable for each and every individual circumstance, so it is important that you receive impartial advice to aid you in making a decision about your future finances.

If, after reading these advantages and disadvantages, you wish to find out more about Equity Release, you can contact a professional at UK Care Guide, and they will be more than happy to answer any questions or concerns you may have.