The equity release industry developed a reputation for poor value in the 1990s due to lack of regulation. In the past few decades, the Equity Release Council (ERC), a trade body, has done much to impose minimum guarantees and service standards for equity release products across the industry. UK personal finance expert Martin Lewis of Money Saving Expert has said that equity release can be a good option for those who are less concerned about leaving an inheritance.[1]
However, Lewis cautions that equity release is a relatively expensive product, for the simple reason that it allows borrowers to access cash immediately, but with no repayments of either interest or capital until death. This means that interest costs compound over time.
Equity release can be a good idea for retired people with a need for cash in the short term, and less desire to pass on their home after death. This could be due to a desire to help children or grandchildren save for a deposit, pay medical or care bills, or even spend on a ‘once in a lifetime’ cruise. However, the obvious objection to equity release is that it can deprive family of an inheritance.
However, this is not necessarily true, for several reasons:
- It is possible to leave an inheritance in other tax-efficient ways, the most obvious being a defined contribution pension, which is outside of the estate altogether.
- As mentioned above, it is possible to use equity release to effectively provide children their ‘inheritance’ immediately. This could be far more beneficial if the children’s own need for money is immediate (for example to pay school or university fees, purchase their own house, or start a business), and will allow the giver the pleasure of seeing how their money helps their children.
- Many lenders will offer an Inheritance Protection Guarantee, meaning a proportion of the equity in the house is ring-fenced from being subject to the loan repayment.
- Even if the wish is to allow children to inherit a family home, many lenders can offer children the option to buy back the home before it is sold to recoup the costs of the equity release, provided the money can be raised within a certain period after the death of the borrower.
An important fact to keep in mind if you choose to release equity from your home, is that you can minimise costs by ensuring you only draw down money as it is needed, rather than accessing a large lump sum at once. Finally, because some benefits, such as Pension Credit, are calculated based on your cash savings, it is worth emphasising that using equity release may affect your entitlement to benefits. For this reason, it is vital to seek professional financial advice when considering whether equity release is an appropriate solution for you, and an ERC-accredited equity release advisor can help you understand the options available.
[1] Martin Lewis: Is equity release the best option? | This Morning (itv.com) (accessed 15.03.23)
