Is Equity Release a Good Idea in 2023?

Equity release allows homeowners over the age of 55 to access the value tied up in their property while continuing to live there. It has become an increasingly popular option for older homeowners looking to supplement their retirement income. But is tapping into your home’s equity a good idea?

What is Equity Release?

Equity release allows you to release a tax-free lump sum or income from your home without having to sell it or move out There are two main types of equity release

• Lifetime Mortgages – This works like a normal mortgage but no repayments are made until the last homeowners passes away or moves into long-term care. Interest rolls up over time so the amount owed can grow significantly.

• Home Reversion Plans – You sell all or part of your home to a reversion company in exchange for a lump sum or income. You retain the right to live there rent-free for life.

With both types, the equity released reduces the value of your estate and inheritance for your loved ones.

The Pros of Equity Release

There are some potential benefits to equity release if used appropriately

1. Access Tax-Free Cash

Money released via equity release is tax-free. This can provide a useful income boost, especially if your pension and savings are inadequate.

2. Clear Debts

You can use equity release to pay off any outstanding mortgages or loans. This reduces outgoings and gives you greater financial security.

3. Home Improvements

If your home needs renovations like a new kitchen or bathroom, equity release provides funds for this purpose.

4. Gifting Early Inheritance

Releasing equity enables you to gift money to loved ones early if you wish. This can help with things like university fees or house deposits.

5. Future Care Costs

Having a cash lump sum set aside can give you options for paying potential future care costs.

6. No Negative Equity Guarantee

With a lifetime mortgage from an Equity Release Council member, you can never owe more than the value of your home. This protects you from negative equity.

The Cons of Equity Release

However, there are also some significant drawbacks to be aware of:

1. Less Inheritance

As equity release reduces the value of your estate, there will be less to leave to your beneficiaries. For some homeowners this is unacceptable.

2. Impact on Benefits

A cash lump sum could affect your entitlement to means-tested benefits. Get advice on how to structure equity release without losing benefits.

3. Interest Rolls Up

With lifetime mortgages, interest rolls up from day one. This means the debt can double every 10-15 years.

4. Early Repayment Charges

If you later repay some or all of the loan, early repayment charges apply in the first few years. These can be 10% or more of the amount repaid.

5. Moving Home

Equity release is designed to last for life, so moving house can be complex. You would need to transfer the plan to your new home.

6. Future Circumstances

Your needs may change in future, making equity release less suitable. Get advice on whether more flexible options may be preferable.

Is Equity Release Right for Me?

Equity release requires careful thought. Consider your specific situation and goals:

• Do you have sufficient income from other sources like pensions? Releasing equity should not be your only option.

• Are you likely to want to move in the near future? Equity release makes this complex.

• Will losing inheritance be acceptable to your loved ones? Discuss plans with family.

• Could downsizing be a better option? Selling and moving to a cheaper property may raise sufficient funds.

• Have you fully explored other options like using savings or taking in a lodger?

• Does your home require repairs you cannot afford otherwise? This is a good use of released equity.

• Do you have a specific purpose for released funds that would enhance your life?

Expert Equity Release Advice is Crucial

Equity release is complex with lifelong implications. Seeking regulated advice from a qualified adviser is essential to determine if equity release is right for your needs.

An adviser will:

• Assess affordability based on your circumstances

• Recommend if equity release is suitable or if alternatives are preferable

• Research the whole market to find you the best equity release deal

• Clearly explain all costs and features of recommended products

• Ensure you fully understand the lifetime implications so you can make an informed decision

Equity Release Considerations in 2023

Some additional things to factor in if considering equity release now:

• Rising interest rates – This increases lifetime mortgage costs so seek a fixed interest rate deal.

• House price falls – Your home may now be worth less than in 2020, reducing how much equity can be released.

• Inflation – Released equity sums will have less purchasing power due to high inflation. Make sure the amount meets your needs.

• Lender criteria – Some lenders have tightened age and property value limits, reducing options for some.

• Benefits freeze – With many benefits frozen, equity release may be less viable if it impacts your entitlements.

Equity release allows older homeowners to tap into their property wealth but has major downsides like less inheritance and escalating interest costs. It is unsuitable for many but can be appropriate if used carefully for specific goals and after receiving expert advice on alternatives. With equity release, you are borrowing against your home so consider carefully if this option is right for you.