The Pros and Cons of Equity Release

Retirement is supposedly the time where you get to enjoy your golden years doing the things which give you joy in life. For many people, most of their working lives have involved an effort to secure as comfortable a retirement as possible via pension contributions.

Equity written in wooden scrabble pieces

However, sometimes a pension isn’t enough to cover all the unexpected things life can throw at you during your retirement. That’s why equity release exists as a method to unlock value from your home as a lump sum.

If you’re over 55 then you can make use of equity release to access some of the finances locked up within the value of your home. There are pros and cons to doing this though, so you need to make sure that the benefits outweigh the drawbacks for your situation.

The pros of equity release

If you choose to release funds from your home using a lifetime mortgage – a form of equity release – then the cash lump sum you receive will be tax-free. This way, you can be sure that you won’t lose a substantial portion and fall short of your expenses yet again.

Your mortgage also doesn’t need to be fully paid off to use equity release either. The amount you receive can be based of the overall amount of your home that you do own without having to sell.

A house for sale concept

Equity release is an alternative to downsizing your home. Downsizing typically means selling your home in order to buy a smaller, less expensive home. This allows you to retain the price difference to spend as you wish at the cost of leaving your original home behind.

There aren’t any monthly interest repayments to pay on your equity release borrowing either. All the interest gets calculated on a rolling basis and gets sorted out when it comes to selling your home – whether that’s later down the line or when settling your estate as part of your will.

The cons of equity release

When you look to repay your home equity release loan is when some of the drawbacks can kick in.

Because a portion of your house sale will need to be used to repay the loan amount, your family could be left with a smaller inheritance when your estate is settled up. Whether you’ve used a lifetime mortgage or home reversion plan, your family could lose out on a large portion of the property sale value because of this.

Using a pen and a calculator

If you choose to sell sooner, the same principle applies. The amount taken to repay the equity release loan could impact any potential profit made from the property sale. Although house-price inflation could see your house increase in value, that increase will likely be needed to cover the lump sum you borrowed.

Should you wish to end your equity release plan sooner than originally agreed with your lender, it could present other difficulties. There are usually steep fees or penalties for ending your plan outside of the original plan. The same applies if you decide to switch to a different product.

Equity release provides a useful product for helping you out when you’re in a pinch with no regular paycheck. Provided you are fully aware of what equity release involves and how it can potentially impact the future finances of your family, making use of it can be an effective way to free up your finances without needing to leave your home.

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