The pros and cons of equity release
As life progresses and your retirement is tantalisingly close, you may realise you need alternative funding. You may want to use this money to go travelling, upgrade your home or live your life to the full.
Equity release is a path that many UK homeowners go down as it can free up money that is being held in your home. However, there are benefits and drawbacks to this process. Let's take a look at both arguments so you can make an informed choice if you are considering it.
Equity release requirements in the UK
There are a couple of main conditions that you need to fulfil to be eligible for equity release. You must be over 55 and be a homeowner. Most contracts do require your home to be worth a minimum amount, usually £70,000.
Releasing equity is a popular choice, with 17,208 homeowners opting to release tax-free cash from their homes between April and July 2023.
What are the benefits?
Several benefits are associated with equity release.
- Unlock cash – depending on how much you release, you can retire comfortably and live life exactly how you imagined. With house prices rising over the past few years, a lot of your wealth is tied up in your home, so you can access it and still leave your home to your beneficiaries.
- Ownership – despite the equity being taken from your home, you remain the full owner and can stay in your home for as long as you want to.
- Lifetime mortgage – if you opt for a lifetime mortgage, you are able to make reduced payments and can also overpay if you can afford to. This offers a greater degree of flexibility, which is important in the current economy.
What are the drawbacks?
As with all financial decisions, it is important to be aware of any risks or drawbacks.
- Interest – lifetime and payment-term lifetime mortgages will accrue interest as they are secured against your home. This can lead to the amount you owe growing, so it is worth being aware of that when planning financially.
- Home repossession – with a payment-term lifetime mortgage, there is a period of mandatory payments. If you do not keep up with payments, ultimately your home may be repossessed.
- Reduced value – releasing equity will reduce the value left in your home. This could mean you are unable to refinance in the future or you may find your means-tested benefits are affected.
- Early repayment – as with most loans, repaying early can incur fees and make it more expensive, so bear that in mind when thinking about your financial forecast.
How to know if it is right for you
Equity release is a great process as long as it is right for you. You need to weigh up the pros and cons and make sure you feel secure in your decision. Remember to also factor in your current savings as well as any other sources of income such as a rental property.
