The Advantages and Disadvantages of Equity Release

Unfortunately, the early years of equity release were blighted by poor advice and unsuitable products and elderly people could – and did – lose their homes.

The financial services industry acted quickly to put matters right and today equity release is both a tightly regulated part of the industry and a product which can be a very valuable financial tool in the right circumstances.

It may be appropriate to start with a simple definition. ‘Equity release’ is a general term used to describe products which allow you to borrow money secured against your home or to sell all – or part – of your home without having to move. You are releasing the equity (cash) tied up in the value of your home.

Clearly many older people have built up substantial equity in their property, especially as prices have risen over recent years. However, it doesn’t automatically follow that equity release is the right answer if they do find themselves ‘property rich and cash poor.’ As with many aspects of financial planning there are distinct pros and cons to equity release, and in this article we look at the main ones.

The Advantages

The main advantage of equity release is simple – it gives you extra money. What people do with the money is entirely up to them, but typically we see clients:

• Using the cash from equity release to boost their income in retirement. It’s a simple fact that most of us have not saved enough for our retirements and equity release can help to bridge the gap between what’s coming in and what you need to live comfortably;

• Carrying out home improvements, particularly to make the home easier to live in as they get older;

• Giving it to their children, either so they can see their children and grandchildren enjoying and benefitting from the money – or for a more practical purpose, such as putting their children on the property ladder;

The ‘dream family holiday’ is also a popular option!

• Paying off debt. This is an area where the sums have to be done carefully, but if someone has ‘high interest’ debt – such as credit cards – it can make sense to use equity release to pay off that debt.

What are the other advantages of equity release?

For many people, taking out a loan against their property can mean that the value of their estate is reduced and that there is consequently less inheritance tax to be paid on death. As we’ve said many times, inheritance tax is an area which requires specialist advice, but equity release can be a useful tool in making sure that the tax on your estate is kept to a minimum.

The no negative equity guarantee (NNEG), which virtually all equity release products now have, means that borrower(s) cannot find themselves with negative equity in the event the property market falls – something which was previously a real worry to many older people.

The Disadvantages

So much for the pros: what about the cons?

First and foremost, equity release reduces the equity in your property – hence there is less money for your potential beneficiaries. This can lead to friction in families and we’d always recommend that if you are contemplating equity release you discuss the steps you’re taking with your potential beneficiaries. No one wants to fall out with their children.

Similarly if it is your intention to leave money to charity, equity release will also reduce the money available for that purpose.

Increasing your income through equity release may impact on any means-tested benefits you might be receiving. As your income goes up, so your entitlement to some benefits may go down. Again, this needs looking at carefully before any equity release arrangement is entered into.

Finally, equity release has costs associated with it and these costs can be expensive. Your home will need to be valued, and you’ll need to pay for the advice that you receive from your professional advisers.

That is a brief look at the advantages and disadvantages of equity release. We haven’t had space in this article to look at how much money you can typically release, or at the various equity release products. As we said above, equity release can be a very useful financial planning tool – but it does require specialist advice.

If you have any questions on it, or would like a preliminary chat to look at the options, then please don’t hesitate to contact us. As always, we are only a phone call or an email away.