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Is equity release a good idea? Here are the pitfalls to look out for.

What are the pitfalls of equity release release? Find out here

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No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: December 9, 2021

Is equity release a good idea? This depends upon your particular circumstances. What could be great for one person might not be great for another.

Your situation and needs are unique. So, to get a better idea if equity release is for you, we’d suggest you have a friendly chat with one of the equity release experts we work with.

They’ll be able to give you an unbiased, no-obligation insight into equity release, and help you to see if its right for you.

In this article, we’ll cover the pros and cons of equity release schemes. Our aim to provide you with a balanced perspective, either way.

Quick introduction to equity release

Equity release is a process that allows you to ‘release’ some of the equity you’ve built up in your house. You may have heard such products referred to as ‘lifetime mortgages’ or ‘home reversion plans’ (although home reversions plans are a little different in that you actually sell part of your home and it’s not a popular option today) .

Usually, the lender agrees to offer you a percentage of the value of your home, up-front, but you can continue to live there until you (and your partner) either die or move into long-term care.  The home remains yours and provides you with a windfall, but incurs long-term interest charges on the loan.

The benefits of equity release

Is equity release good or bad? Let’s start with the pros…

It’s tax-free

No income tax or capital gains tax is due on the released funds.

It’s convenient

It’s a relatively straightforward way to access a large sum of money that you can use for whatever you like. You can choose to take the money as a lump sum, a series of small payments, or a mixture of the two.

Mortgages with a ‘drawdown’ facility allow you to borrow and pay interest on, only what you need. This can lower costs, helping to prevent future financial problems with equity release.

You can remain in your home

You and your partner have the right to remain in your home for as long as you need to (i.e. until the last one of you passes away, or moves into long term care). No moving or downsizing is required.

You’ll never go into negative equity

Whatever the housing market does, you’ll never end up owing more than your house is worth. And you’ll never pass any debt to your family.

You don’t have to make repayments

Though some schemes allow for this, if you want to. No repayments makes monthly cash flow easier and your credit history much less of an issue. The lender only recoups their investment once you or your partner no longer need the house.

You can protect a percentage of the value to pass on

Some providers allow you to ensure that, no matter what happens, a certain percentage of the house is passed onto your family. This can, however, affect how much they’ll lend you, and the rate at which they’ll do it.

Now we’ve covered some of the benefits of equity release – you may well be wondering: “What are the pitfalls of equity release?” We’ll cover these below…

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Equity release disadvantages

You’re never at risk of losing your home whilst you (and your partner) can use it. Instead, the real disadvantages of equity release are mainly related to the interest costs – which can grow quite substantially over the years.

It may be costly to arrange

One of the main pitfalls of equity release schemes in the UK is that you may have to pay for the valuation of your home, solicitor fees and the lender’s application fee.

It may make remortgaging difficult

Another potential downside of equity release is that could make remortgaging more difficult in the future as you’ll have a charge against your property. Also, and like many other mortgages, there are often early repayment charges if you want to stop your equity release plan.

It may affect your benefits

Equity release can increase what you hold in cash savings. As such, means-tested benefits such as pension or council tax credit may be affected.

It can erode the value of your inheritance

In most equity release plans, you don’t make repayments – causing the capital and the interest on the loan to compound. This is the cause of many equity release problems over time.

Of course, the debt is settled when the house is sold, but as a result – not much might be left over for your family.

Also, to meet your loan obligation, the property must be sold, you cannot simply leave the property to your heirs once you’ve entered an equity release arrangement.

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So is equity release a good thing?

Customers often ask us things like “is equity release worth it?” and depending on your own personal circumstances it could be a viable option, provided you’ve explored your other options, discussed with it with your family and are fully aware of what it might entail.

Need a little more advice on equity release pros and cons, or some expert help in making the arrangements?

Talk to us. We’ve helped over 120,000 people with the right advice, in fact they consistently rate us 5 stars on Feefo, mainly because of the level of service, but also because we offer access to expert brokers who:

  • Are equity release professionals – they do this every day
  • Cover the whole of the market
  • Have relationships with all the leading providers
  • Have completed a 12 module  LIBF accredited training course

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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