The pros and cons of choosing equity release - Jenny Ross

Jenny Ross says…

The soaring cost of living is making a lot of us think more carefully about our finances. It is also causing some to take big decisions in order to cover expenses like energy, fuel and food.

For those who own a property and are over the age of 55, equity release – a way of using the value of a house to gain a lump sum – has become an increasingly tempting option.

A recent report from the Equity Release Council shows that the number of plans agreed went up by 21 per cent in the first three months of the year.

Ads for equity release certainly make it sound like a no-brainer. It’s a way to generate tax-free cash to pay for things, whether it’s a new kitchen or simply to combat the current rising costs.

What’s more, issues that previously gave it a dodgy reputation – opaque, inflexible terms and conditions, for example – have been somewhat ironed out by the market.

Rising house prices have helped to drive up equity release activity in the past year and led to an increase in the average amount withdrawn: £125,000, up from £105,905 in 2020.

However, if house prices fall or stagnate, you could find your debt growing at a faster rate than the value of your property reducing your overall equity.

Lifetime mortgages are the most popular type of equity release and work by taking out a loan against your property, repaid from the proceeds of its sale when you die or move into long-term care.

You can take a lump sum – with interest charged on the whole amount at a fixed rate – or you can opt to take chunks of cash out when you need it, only paying interest on the money you’ve taken.

But choosing to try to generate cash in this way remains a huge decision – one that isn’t easy to revise further down the line and could end up costing much more than you’d expected

Three questions you should ask yourself before pursuing equity release are: do you have enough income to live on in retirement?

Is downsizing a viable option? And is passing a large inheritance on to your family important to you? If the answer to any of the above questions is yes, equity release may not be for you.

Borrowing via equity release schemes isn’t cheap but may be your best option if you don’t have enough income to cover your costs in later life.

If you have enough to live on but want to fund bigger purchases, consider a personal loan or interest-free credit card, which is likely to be a far cheaper way to borrow.

If feasible, downsizing or moving to a cheaper property is preferable to equity release, particularly if the aim is to clear an outstanding mortgage.

That way you’ll avoid the huge costs of compound interest. However, don’t forget that moving house brings its own costs.

Some plans guarantee you’ll be left with an inheritance to pass on by ringfencing some of your property’s future value.

But this doesn’t change the fact that using equity release will usually reduce the size of your estate and the amount you’ll be able to leave behind for loved ones.

There is a counter argument that it can help reduce a potential inheritance tax bill and provide a ‘living inheritance’ by freeing up cash that you can use to help your family now.

Those on lower incomes who are borrowing for home improvements or conversions to deal with disabilities may be able to access local authority grants.