Equity release explained - and the pros and cons of accessing funds early

Tuesday, 6th October 2020, 3:31 pm
Updated Tuesday, 6th October 2020, 3:31 pm
Equity release is traditionally a loan that offers homeowners a lump sum, and the total amount depends on a range of factors (Photo: Shutterstock)
Equity release is traditionally a loan that offers homeowners a lump sum, and the total amount depends on a range of factors (Photo: Shutterstock)

by Derin Clark

As the coronavirus pandemic continues to impact the UK economy, many are looking for ways to boost their finances and help loved ones who are struggling.

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One way older homeowners are able to gain a lump sum of money is by releasing equity from their home through an equity release deal. Here, we’ve looked at what equity release is and the pros and cons of releasing money from your home through equity release.

What is equity release?

Equity release, also sometimes known as a lifetime mortgage, enables homeowners over the age of 55 to release some of the money (or equity) in their homes.

Equity release is traditionally a loan that offers homeowners a lump sum, and the total amount depends on a range of factors, including the age of the borrower and the amount of equity in their home. The loan does not have to be repaid until the borrower dies or moves into a permanent care home and is repaid, along with interest accrued, when the house is sold.

What are the advantages of equity release?

There are many advantages to equity release. One of the main benefits of choosing equity release is that it allows homeowners to free up money from their homes, without having to sell their home and downsize. Often, retirees have used the money from equity release to top up their pension pots. Recently, many people have been opting to use equity release as a way to pass on inheritance to children and grandchildren early, with many using the money to help towards a deposit for their first home.

Along with this benefit, in the last year competition within the equity release market has soared, resulting in a fall in rates and an increase in product choice. According to figures released by Key Partnership at the beginning of September, during 2020, a new equity release deal was launched every 28 hours.

In fact, research carried out by Moneyfacts.co.uk found that year-on-year, the average rate on an equity release deal had fallen by 0.68%, from 4.89% in September 2019 to 4.21% in September 2020.

In addition to this, products have become more flexible and there is now a greater choice of equity release deals that allow drawdown, which enables borrowers to take the money in smaller chunks over a period of time, as well as deals allowing interest repayments.

What are the disadvantages of equity release?

Although there are many advantages to equity release, it can have a serious impact on long-term finances. One of the major disadvantages of equity release is the impact it has on inheritance left to loved ones. Not only will the loan of the equity release be repaid from the sale of the house, but also interest accrued during the loan period, unless repayments were made during the borrower’s lifetime. This means that loved ones could be left with little inheritance from the sale of the house.

Another factor to consider when deciding whether to release equity from a home is the additional costs involved. Just as when taking out a mortgage, equity release often involves additional costs such as valuations and arrangement fees that can quickly mount up. It can also impact on any means tested state benefits that are available to homeowners.

With the significant costs involved in equity release, along with the long-term impact it can have on finances, those considering equity release should speak to an independent financial adviser first to ensure it is the right option for their individual needs.

To find out more about equity release and whether it is right for you, read the equity release guide on Moneyfacts.co.uk.