Equity Release: Pros, Cons & Alternatives to Consider

Before you can decide whether equity release is the right choice, you’ll need to understand all the advantages and disadvantages.  

Here, we’ll take a closer look at all the main benefits and drawbacks of this type of borrowing, and consider what the best alternatives could be.

Is equity release a good idea?

Yes, equity release can be a strong option if you’re age 55 or over and want to release tax-free cash tied up in your property without having to move home or make monthly interest repayments (unless you choose to). 

The equity you release can be used for: 

• Home improvements
• Supplementing retirement income and lifestyle
• To assist a family member get on the property ladder

However, equity release is also a long-term commitment that lasts until you either die or move into long-term care. As a result, the overall cost, which includes the compound interest that accrues (interest on the interest), can be high, dramatically reducing the equity in your home. 

This means it’s essential to carefully consider all of the pros and cons, along with assessing other viable alternatives, before making any final decisions.

Advantages of equity release

The key benefits of an equity release scheme are as follows:

Access to a tax-free cash lump sum

If your overall wealth is weighted more towards property than liquid cash, an equity release scheme could be the perfect vehicle for accessing the money held in your home. 

This liquid tax-free cash can either be paid as a lump sum if you want to make any necessary purchases (new car, holiday, etc.) or drawn down as and when needed to top up your retirement income. 

Maintain ownership of your home

Lifetime mortgages (the most common form of equity release) allow you to maintain full ownership of your property. So, this avoids any hassle or necessity to move/downsize simply to access the equity. 

This also means you can still benefit from increases in the property market as the value of your home can still rise, leaving more flexibility to access more equity in the future if you need it. 

No monthly interest repayments

There’s no requirement to make regular monthly interest payments for equity release, making it an attractive option for retirees whose pension income is often lower than they were receiving from their employed earnings. 

Additional consumer protection

It’s a legal requirement to seek professional advice before proceeding with an equity release scheme. Providers who are members of the Equity Release Council (ERC) are also duty-bound to include a no-negative equity guarantee on all of their products. 

Disadvantages of equity release

The main drawbacks you should also consider are: 

Reduces the overall size of your estate

The amount you borrow, plus the accumulated interest, is usually repaid in full upon your death (or if you move into a care home, whichever is earlier). This will take quite a large portion of wealth out of your estate, leaving less to pass on to your beneficiaries. 

High interest charges and associated fees

With no regular interest repayments (unless you choose to do this), all interest charges accrue on a compound basis. The longer you live, the more interest will accumulate. Other fees, such as for the initial advice, provider charges, property valuations and legal costs, are also applicable for this type of borrowing. 

Lack of flexibility

While it’s not impossible, moving homes with an equity release scheme can be more complicated as the borrowing would need to move with you. Porting to another type of loan would also incur further costs. 

Can affect means-tested benefits

Certain means-tested benefits, such as pension or universal credit, can be reduced or even lost entirely due to the lump sum you receive from an equity release scheme. Careful consideration should be made of how this could impact your overall finances. 

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Alternatives to consider

If you’re still not sure whether equity release is the correct route you want to take, several alternative options may be more suitable, such as: 

Remortgaging to release equity

If you’re still employed and your home has an existing mortgage, remortgaging to release further equity is a strong option. Remortgaging can be particularly appealing if you want to raise a specific amount for a particular purpose (e.g. a new kitchen or a deposit for a second home). It will also likely work out cheaper overall. 

Downsizing

If the idea of moving home does not phase you then you can consider downsizing to a cheaper property. This option avoids any loan interest charges and other fees associated with an equity release scheme. 

Using savings and investments

Equity release can be attractive if you have no other assets available to draw on besides your home. However, if you do have further savings and investments, it would likely be more cost-effective to use these funds first.  

Retirement Interest-Only Mortgage (RIO)

With an RIO mortgage, you’re obligated to make monthly interest payments. So, if you have sufficient retirement income, this option will reduce the overall impact on your estate, as only the original amount borrowed will need to be repaid when you die.

Why choose Teito for your equity release needs?

As members of the Equity Release Council (ERC), our advisors can help you make the right choice based on your specific financial circumstances. 

Here are some of the reasons people choose Teito for their equity release needs: 

• Your initial consultation is FREE, with no obligation to proceed
• Teito is a fully-fledged member of the Equity Release Council
• Our advisors can take you through all the alternatives so you can make an informed decision
• We are rated 5-star on leading review websites

Ready to get started with an independent equity release advisor? Fill out our quick form to book your free, no-obligation consultation now.