Is Equity Release A Good Idea?

Equity release is growing in popularity with UK homeowners over the age of 55. Like them, you might be attracted by the idea of accessing your property wealth to get cash to spend now, with no repayments until after you die.

However, equity release isn’t the right choice for everyone. There are some potential downsides to consider. In this article, we’ll discuss the advantages and disadvantages, along with where you can look for guidance before making your decision.

We’ll explain the following topics…

Is equity release a good idea?

Yes, it can be if the circumstances suit. Releasing equity is a viable option for homeowners with property wealth that they would prefer to access in their lifetime rather than pass on when they die.

Unlocking tax-free cash from your property can benefit many people, but seeking professional advice before doing so is vital.

This form of borrowing isn’t right for everyone. There are alternatives to consider and important factors to consider before you press ahead. For example, do you want the option to ring-fence some capital to leave behind as inheritance?

With all of this in mind, it’s challenging to provide a ‘one-size-fits-all’ answer to this question, but if you read on, you’ll get a clearer idea of whether equity release is a good idea for you.

What are the different types of equity release?

Equity release comes in two main forms, and understanding the differences is crucial before making a decision. The right option depends on your financial goals, future plans, and whether you want to retain full ownership of your home.

Lifetime mortgage

A lifetime mortgage is the most common form of equity release and allows you to borrow a percentage of your home’s value while retaining ownership.

How it works:

• You receive a tax-free lump sum or access funds in stages (known as a drawdown lifetime mortgage)
• No mandatory monthly repayments, although some plans allow voluntary interest payments
• Interest accrues over time and is added to the loan balance (compounded)
• The loan is repaid when you sell the property, pass away, or move into long-term care

Who it’s best for:

• Homeowners who want to keep ownership of their property
• Those who want flexibility (e.g., choosing a lump sum or drawdown)
• People concerned about inheritance, as some plans offer inheritance protection

Key considerations:

• Interest rates are higher than standard mortgages and compound over time.
• The loan reduces the amount of inheritance left for your family.
• Some plans have early repayment charges (ERCs) if you decide to pay off the loan early. 

Home reversion plan

A home reversion plan works differently from a lifetime mortgage because you sell a portion (or all) of your home to a provider in exchange for tax-free cash.

How it works:

• You sell a percentage of your home to an equity release provider below market value
• You can continue living in the home rent-free for life
• When the property is eventually sold, the provider receives their share of the proceeds

Who it’s best for:

• Homeowners who don’t need to retain full ownership of their property
• Those who want a guaranteed inheritance (by only selling a portion of the home)
• People who need the maximum possible equity release and aren’t concerned about passing on their home

Key considerations:

• You lose full ownership of the portion you sell
• The provider pays less than market value for the share of your home
• If property prices rise, you won’t benefit from the increase on the share you’ve sold

Benefits of equity release

Here are the main reasons why you might want to consider equity release and some of the positive features you might not be aware of:

You’ll receive a tax-free cash lump sum

You’ll get cash to spend on whatever you want or need. You may also be able to get cash by selling other assets you own, but doing so could incur a capital gains tax charge.

With equity release, there is no income tax, capital gains tax, or any other tax due to the cash you receive.

There are no repayments in your lifetime

If you were to take out another type of loan against your home, you’d have to begin repaying it immediately. With equity release, this is only necessary after you die.

However, some lenders will allow you to make repayments in your lifetime if you’d like to. By doing so, you could have more wealth to pass on to loved ones after you’re gone.

You can continue to live in your home

Another way to access some of your property wealth in your lifetime is by selling your home and moving to a smaller, cheaper one. But, if you’d prefer to stay where you are, equity release allows you to do that.

Your right to remain in your home is protected until you die or move into long-term care as long as your lender is a member of the Equity Release Council.

You won’t pass on debt to your loved ones

Most equity release schemes include a “no negative equity guarantee”. This means that, no matter what, you will never have to repay more than the value of your home.

Even if the housing market falls, and your property sells for less than the loan amount and interest due, your loved ones will not be responsible for the remaining debt.

You may still be able to pass on wealth to your loved ones

In some instances, lenders will allow you to ring-fence a percentage of your home’s value to be passed on to your loved ones after you die. However, this might mean that you get less cash to spend now.

Potential pitfalls of equity release

Here are some of the risks associated with equity release that come with the positives:

Your loved ones will inherit less

If you choose to access your property wealth in your lifetime, you’ll have less to pass on to your loved ones after you die.

Once your home is sold and the loan amount, interest, and fees are paid, there may not be much for them to inherit. Sometimes, there is nothing at all.

Your home won’t be passed on

If your home must be sold after your death to repay the loan, it will no longer be kept in your family.

Some lenders will allow your loved ones to repay the loan through other means, such as existing savings, to avoid selling the home, but this isn’t always an option.

There are costs involved

You may need to pay an application fee, a solicitor’s fee, and a valuation fee.

If you decide at any time to leave your equity release agreement and repay the loan in your lifetime, there will often be an early repayment charge.

It could affect your benefits

If you receive means-tested benefits, including pension credit or council tax support, you may no longer be entitled to these after you receive a cash lump sum from your equity release provider.

It will be difficult to remortgage

Choosing equity release now will mean that your property is charged. If you later decide to raise capital against your home another way, such as remortgaging, this will make it difficult to do so.

There are some rogue providers to look out for

Most equity release providers opt to be members of the Equity Release Council. They must offer a “no negative equity guarantee” and the right to remain in your home until you die or move into long-term care.

However, if you sign a contract with a provider who is not a member, they might not offer these features.

How a broker can help with equity release

It’s essential to seek expert advice before you make your final decision about equity release. While equity release providers can connect you with an adviser, you’ll get more impartial advice from an independent broker.

Here are some of the ways they can help:

• Find you a deal that allows you to ring-fence some of the property value, so you have peace of mind there’ll be some money left over for your loved ones
• Identify a lender who will allow your loved ones the opportunity to repay the debt without selling your home
• Help you to find the cheapest deal for your circumstances, keeping costs and fees to a minimum
• Work with you to understand your full financial situation, including any benefits that could be affected if you proceed with equity release
• Advise you on your other options besides equity release, which could include remortgaging your home with a conventional mortgage
• Only offer you products that the Equity Release Council approves

Summary of pros and cons

The table below summarises the positive and negative features of equity release very briefly. You shouldn’t rely on this to make your decision.

Instead, you should speak to an expert who fully understands your financial situation and how equity release will affect it.

Equity Release Calculator

If you’d like to find out how much equity you may be able to release from your property, take a look at our easy-to-use equity release calculator here:

Speaking to an equity release specialist

If you need help making a decision about equity release, you should speak to an expert who has relationships with all the major lenders and can offer unbiased advice about the whole market.

We work with numerous specialists in this area and can connect you with one of them for a free, no-obligation chat to discuss whether equity release is right for you. So, if you have any questions you need answering, call us today on 0330 818 7026 or make an enquiry here.