Equity release can be a great way to pay for a once in a lifetime round-the-world trip, pay for private medical expenses, or give a helping hand to younger family members.
However, there are several downsides and risks to be aware of when considering equity release. Here are six of the most important to consider:
- Your home will be sold on your death to repay the loan
- Lifetime mortgages charge compound interest
- Home reversion plans mean you won’t benefit from the full increase in the value of your property
- Taking a lump sum can affect your entitlement to means tested benefits
- There are steep early repayment charges compared to traditional mortgages
- Your family will inherit less when you pass away
Let’s take a look at each of these pitfalls in more detail.
The first and most obvious is that your home will be sold on your death to repay the loan, and so will not be passed on to your family. In situations where children are expecting to inherit the family home, this could make equity release unsuitable. Always consult with the beneficiaries of your estate before committing to an equity release plan.
It is vital to understand that, using the most common type of equity release, a lifetime mortgage, you are not paying back the loan while you are alive and so interest charges will compound. This means that on your death, your estate will have to pay back much more than the value of the original loan.
Reputable providers of equity release, such as members of the Equity Release Council, will offer a ‘no negative equity’ guarantee, meaning the loan plus interest cannot be worth more than the value of your house. However, the unavoidable consequence of equity release is that your family will inherit less upon your death. The only way this situation could perhaps be mitigated is by investing the money released, rather than spending it.
It is also worth noting that, because you do not pay interest on the loan in your lifetime, the amount of equity you are able to release will be calculated based on your age and health, and will certainly be much less than the full value of the equity in your home.
Under an alternative type of equity release scheme called ‘home reversion’, you are essentially selling the provider a share of the equity in your home in return for cash. This means that, while there are no interest charges to pay, you will not benefit from house price appreciation on that share of your house.
There are costs involved in arranging equity release, including a house valuation, administration fees and solicitor’s fees. It is especially important to note that many equity release products can have very steep early repayment charges. Additionally, it is important to note that, by providing cash up front, equity release could also affect your entitlement to means tested benefits, such as pension credit.
Finally, there are other ways to access the money locked up in your home, such as re-mortgaging. Since equity release will affect the equity you have in your home, it will make it difficult to raise money against the home in other ways.
A specialist equity release adviser can help you navigate the pitfalls and understand how these trade-offs apply to your specific case.