What is Equity Release > Pros And Cons Of Equity Release

The pros and cons of equity release

Is equity release a good idea for you? Read our guide to the main advantages and disadvantages of equity release.

Understanding the opportunities and potential pitfalls of equity release

Equity release has become a popular way for homeowners aged 55+ to unlock some of the tax-free money tied up in their bricks and mortar, without having to sell or move house. 

However, as with other financial options, there are some disadvantages of equity release, as well as potential benefits.

If you are considering this form of later life lending, you might be wondering what the advantages and disadvantages of equity release might be. To help you decide if it’s right for you, here are some of the main equity release pros and cons that you may wish to consider.

After familiarising yourself with the pros and cons of equity release, why not contact our friendly team to find out more? Talk to our friendly consultants by calling 0808 178 3055 or request a call back.

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How does equity release work?

Before we get into the pros and cons of equity release, let’s take a minute to explain how it works. Equity release is a way to unlock some of the value in your home as tax-free cash to spend however you wish. 

The most common type of equity release is a lifetime mortgage, where you take out a loan and put your home up as security. You still own your home and there are no mandatory monthly repayments. Instead, the loan plus interest is repaid when you die or move into long-term care.

As we’ll see, one of the disadvantages of equity release is that the interest ‘rolls up’ each month through compound interest. This makes a lifetime mortgage more expensive than more traditional mortgages. However, you can prevent or reduce interest building up by taking out an interest-only equity release plan and pay off all or some of the interest each month.

Advantages of equity release

Below are some of the main advantages of a lifetime mortgage. (The other form of equity release is a home reversion plan.) 

  • You can unlock the money needed to enjoy a happier retirement without having to sell or downsize your home.
  • You can continue to live in your own home for the rest of your life, or until you move into residential long-term care.
  • You don’t have to make loan or interest payments as everything is eventually paid back through the sale of your home (although you can make payments if you wish to reduce the amount of interest that accrues). 
  • You can choose to receive the money as a tax-free lump sum or by drawing down regular, smaller amounts as and when you need them. 
  • If your property benefits from future house price increases, you may be able to apply for more money if you wish.
  • You can move (‘port’) your plan to a new home if you wish to move house in the future,  providing your new home meets suitability criteria. 
  • You will be protected by the Equity Release Council’s ‘no-negative equity guarantee’ which means you or your beneficiaries will never owe more than the value of your home.
  • You can use the money in any way you choose; some popular uses for equity release include making home improvements, paying off your mortgage and helping loved ones.
  • Equity release can be a lifeline for over-55s stuck on an interest-only mortgage with no other means of repaying it.

Disadvantages of equity release

Equity release isn’t for everyone, and it’s important to understand the potential disadvantages of equity release and risks of this form of finance:

  • One of the main negatives of equity release is that it will reduce the value of your estate and the amount of inheritance you can leave to your family.
  • Another equity release negative to consider is that the total loan amount can grow quickly as the interest rolls up on a compound basis.
  • Releasing money might affect your entitlement to some means-tested state benefits.
  • If you are receiving homecare which is fully or partially funded by your local council, then your eligibility may be affected, or you may have to pay more towards it.
  • There may be early repayment fees to consider if you wish to repay the loan plus interest early, although some lenders waive these in some circumstances.
  • If you give some of the money you release to family or friends as a gift, they may be liable to pay inheritance tax in the future.

Weighing up the pros and cons of equity release

You can see from the various pros and cons listed above that equity release can offer financial relief and flexibility, but it’s not without its risks and considerations. 

With that in mind, it’s essential you research your options and seek financial advice from a qualified specialist like our selected advisers.

They can check if any disadvantages of equity release could be a potential issue for you, and weigh these up against the benefits of equity release which are most relevant to you. This will help you decide if a plan will align with your long-term financial goals. 

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Already have a lifetime mortgage? You could switch for a better deal

Now could be a good time to switch to a different lifetime mortgage. You may be able to release more tax-free cash due to being older than when you took out your existing plan. An increase in your property’s value or being in poorer health could also qualify you for further cash. Interest rate changes may also save thousands over the lifetime of your plan.

Why not arrange a free review* to find out if switching works for you?

How can I minimise the pitfalls of equity release?

We have listed six of the main potential equity release negatives above, but there are ways to minimise many of the pitfalls of equity release:

Reducing the overall cost of the loan

The impact of compound interest on the total cost of a lifetime mortgage may be one of the main disadvantages of equity release that concerns you. With compound interest, lenders add interest to the loan AND to the interest previously charged.

This means that the amount paid back when you pass away or move into long-term care might be considerably more than the original loan. This will eat into any inheritance you leave when you die, or into any money you receive from the sale of your home when going into long-term care. 

However, it is possible to reduce the impact of compound interest. By taking out an interest-only lifetime mortgage, you agree to make interest payments each month. If you pay the full interest and make every payment, all that’s repaid when the plan ends is the loan itself. Alternatively, all plans approved by the Equity Release Council allow you to make payments whenever you wish towards the interest to reduce the amount payable at the end of the plan.

Inheritance protection

Another way to address the pitfall of equity release where the value of your estate is reduced, is to choose inheritance protection when taking out a plan.

Many lenders give you this option, where you ring fence a proportion of your home’s value outside of the equity release plan. Regardless of how much interest accrues on your plan, however much equity you set aside will be there as a guaranteed inheritance when your plan ends. 

To demonstrate this, here is a simple example:

  • You are eligible to release 50% of the value of your home, which has a value of £300,000.
  • Instead of taking all of the available £150,000, you take £50,000.
  • This leaves £100,000 as the inheritance guarantee.
  • If your property increases in value, the actual amount protected will also increase, as lenders base this on a percentage of your home’s value.

Some of the non-protected value of your home may also be available as an inheritance. How much will depend on the size of the loan plus interest and the value of your property when you pass away.

Inheritance tax planning

As we mentioned under ‘Disadvantages of equity release’ above, another of the potential equity release negatives is that inheritance tax may be payable on money you gift to your family from your release.

However, your estate would only pay inheritance tax on this gift if you pass away within seven years. Also, it is typically only payable when your estate including the gift is valued above the current threshold (please check gov.uk/inheritancetax for the current threshold.)

We would suggest that you receive professional advice from a suitably qualified and authorised tax specialist if you wish to look at the inheritance tax implications of releasing equity to gift to loved ones.  

Minimising repayment charges

As with other types of loan, you may incur early repayment charges if you wish to repay the loan early. This may not be a concern to you if you have no intention of paying the loan back early. However, if it’s something you may consider in the future, it’s worth looking at different lender’s terms and conditions when choosing your plan.

For example, some lenders offer ‘Significant Life Event Exemptions’ where there are no early repayment charges in some circumstances. These may include your partner passing away or moving into long-term care. Lenders may also offer ‘Downsizing Protection’ where you can repay the loan without penalty when downsizing, once you have had your plan for a few years.   

Protecting your eligibility for benefits or care costs

Releasing equity could have a negative impact on your eligibility for certain means-tested benefits, or for at-home care funding. In some cases, the authorities take the amount of savings you have into consideration when assessing you for these benefits.

One way to potentially mitigate against this risk is to take your cash releases in stages with a drawdown lifetime mortgage rather than as a single lump sum. 

By carefully considering the pros and cons of equity release in relation to its effect on your benefits entitlement, you may be able to manage the risk of losing out. We would suggest that you talk to Citizens Advice or appropriate government agencies if you are in any doubt about how releasing equity might affect your entitlement to benefits.

Is equity release a good idea?

Many customers ask us the question ‘Is equity release a good idea?’. The answer is always the same: whether the potential disadvantages of equity release are outweighed by the advantages depends on your personal circumstances. 

For some older homeowners and their loved ones who might be struggling financially, equity release can be nothing short of a lifeline. For others, equity release is an opportunity to tap into their booming property wealth to enjoy a more luxurious retirement. 

Whatever your reasons are for wanting to unlock some of the money from your home, our selected advisers can help you weigh up the pros and cons of equity release to help you decide if it’s right for you.

They can also help you assess possible alternatives to help you decide ‘is it worth taking equity release or would an alternative be better?’

For instance, if you require short-term borrowing and a family member could help you out, then perhaps equity release isn’t the best option right now. On the other hand, if you are struggling to pay your mortgage, bills and credit cards every month and can’t see a way out, then equity release could help you to get on top of everything again.

Read more: How could equity release help you?

Speak to the team today

Still have some questions after reading about the benefits and pitfalls of equity release? For professional advice from one of our selected advisers, please call free on 0808 178 3055 or request a call back at a time convenient to you. They will be able to help you assess whether equity release is a good idea for you, including looking at whether there is a better alternative to equity release.

Did you know?

Thanks to industry body the Equity Release Council, a number of standards have been introduced to protect you. To help anyone weighing up the benefits and pitfalls of equity release, UK homeowners can read a handy summary of those standards here. They include the no-negative equity guarantee and the right for you to remain in your home for as long as you want.

How can we help?

To find out more about equity release or arrange a consultation with an adviser, please call or request a call back and we’ll be happy to help further.

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Answering your questions

Still unsure of a few things? We’ve got you covered with answers to some of our most frequently asked questions.

  • Is equity release safe?

      Equity release is well-established within the UK financial services industry and consumers are protected when taking out equity release plans. Through Financial Conduct Authority regulation and standards laid down by the Equity Release Council, you have the reassurance of considerable consumer protection when taking out an equity release plan. Please see our guide ‘How is equity release regulated?’ for more information.

  • When is equity release a good idea?

      Everybody’s circumstances are unique, so a careful assessment of the benefits and disadvantages of equity release and your individual circumstances is essential. We would love to provide a definitive answer to questions like ‘Is equity release worth it?’ but you really do need advice from a qualified and regulated equity release specialist. This is something that the team here at Equity Release Wise can arrange for you.

      During your appointment, your specialist will explain the advantages and disadvantages of equity release to help you decide: is equity release good or bad for your personal circumstances?

  • How much can I borrow with a lifetime mortgage?

      The amount you can unlock from your home depends on a number of factors including your age, health and property value. However, standard equity release lifetime mortgage plans typically allow you to release 20-60% of your property value – the older you are, the more you can release.

  • How long does it take?

      On average equity release plans take around 6-8 weeks to complete. Some straightforward cases can complete more quickly, whilst more complicated cases can sometimes take longer. Your adviser will keep you updated and will let you know when you can expect your tax-free money to be paid out.

  • How much does it cost?

      Just as with a normal residential mortgage, you should be aware of costs involved in setting up an equity release lifetime mortgage. Your adviser will make sure you understand these in full before you decide whether to take out a plan, but below is a summary.

      Your lender will typically charge valuation, arrangement and completion fees, with further fees payable to the solicitor who acts for you. Some of these fees can be paid from the money you borrow, so you may not have to worry about finding them from your existing savings.

      Our selected advisers naturally charge an advice fee – but remember that any initial advice or information you receive from them is completely free and without obligation. You only pay them a fee if you apply AND your case completes.

      Once a plan is taken out, there aren’t normally any fees. One exception is an early repayment charge that some lenders request if some or all of your lifetime mortgage is paid off before you pass away or move into long-term care.

Your equity release options

See the links below for guides to the different types of lifetime mortgage, or call 0808 178 3055 or request a call back to arrange a consultation with our selected equity release advisers.


Product lump sum icon

Lump sum lifetime mortgage

Access a tax-free cash lump sum if you’re a homeowner aged 55 or over. You retain full ownership and can stay at home until you pass away or move into long-term care.

Read more about lump sum lifetime mortgage plans
Product drawdown icon

Drawdown lifetime mortgage

Instead of making a one-off cash withdrawal, you take an initial cash sum and additional funds as and when you need them. This helps to reduce the total interest you pay.

Learn more about drawdown lifetime mortgage plans
Product interest only icon

Interest-only lifetime mortgage

A more cost-effective method of equity release where you make voluntary interest payments to reduce or prevent compound interest building up.

Discover more about interest-only lifetime mortgage plans
Product enhanced icon

Enhanced lifetime mortgage

Certain health conditions or lifestyle factors could qualify you for higher cash releases or lower interest rates. A simple questionnaire is all that’s needed to check eligibility.

Read more about enhanced lifetime mortgage plans
Product second home icon

Second home lifetime mortgage

If you have a second home you may be able to secure a lifetime mortgage against it, or make your dream of a second home come true with a release from your main residence.

Read more about second home lifetime mortgage plans
Product buy to let icon

Buy-to-let lifetime mortgage

These specialist plans could enable you to release equity from a buy-to-let property, or to use the wealth in your home to help you make a buy-to-let investment.

Read more about buy to let lifetime mortgage plans

Another, much less common form of equity release may be a more suitable alternative to a lifetime mortgage. A home reversion plan is a type of equity release where you sell all or part of your property at less than market value in return for a lump sum, a regular income, or both. You stay in your home as a tenant, paying no rent, until you pass away or move into long-term care.