What are the drawbacks of equity release?

Asked by: Jennyfer Wuckert  |  Last update: February 9, 2022
Score: 4.3/5 (14 votes)

What are the drawbacks of equity release?
  • Your debt is increased by interest. ...
  • Your benefits might be affected. ...
  • You might be subjected to early exit fees. ...
  • You can't leave your home as an inheritance. ...
  • You have to pay set up fees. ...
  • You won't be able to take out another loan against your house.

What is the catch with equity release?

Equity release plans provide you with a cash lump sum or regular income. The "catch" is that the money released will need to be repaid when you pass away or move into long term care. With a Lifetime Mortgage, you will owe the capital borrowed and the loan interest accrued.

What are the pitfalls with equity release?

The main disadvantage of equity release is that it does not pay you the full market value for your home. You will receive far less money than you would from selling the property on the open market – although of course in that situation you would still have to find somewhere else to live.

Is there a better alternative to equity release?

There are many alternatives to Equity Release, which I always explore with clients. These include: Selling assets, remortgaging, asking for help from family and friends, grants, moving to a cheaper home, state benefits, renting a room, budgeting, changing employment, or simply doing nothing.

Is equity release really a good idea?

Equity release can be a good idea for older people who would like to gain some extra cash in retirement. Equity release can help you make home improvements, pay for the costs of care, help a loved one who is struggling financially, or pay off other debt. However, the release of equity is not suitable for everyone.

Pros and Cons of Equity Release in 2021

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What is the best age to do equity release?

The “core” age group for those signing up to equity release tends to be 65 to 75. However, Dean Mirfin at independent specialist firm Key Retirement says: “Equity release customers are getting older – the average age rose to 71 in 2015, from 69 previously.”

Can I pay back my equity release early?

Can you repay equity release early? If you want to – yes you can, absolutely. However, it's important to reiterate how an equity release lifetime mortgage is designed to remain in place for the remainder of your life or whilst your health allows you to remain living in your main residence.

What is the interest rate on equity release?

What are the interest rates for equity release? The average equity release interest rate was approximately 4% on 11 January 2022. The interest on your lifetime mortgage will depend on how long it runs for and what type of plan you choose.

What is a typical interest rate for equity release?

The lowest Equity Release interest rate is currently 2.90% (AER) fixed for life. The highest interest rate in the market is 6.80% (AER). In the Spring 2021 Market Report, the Equity Release Council stated that average interest rates for Equity Release were 3.95%.

What is the difference between equity release and a lifetime mortgage?

What's the difference between equity release and a lifetime mortgage? Equity release enables homeowners to retain the use of their home while obtaining an income or funds from it. A lifetime mortgage is one of the two main types of equity release products, the other being a home reversion plan.

What happens to the house after equity release?

When you die, your home will usually be sold by the executor of your estate, and the proceeds used to pay back the equity release plan (as well as to pay agent and solicitor fees). If there is still money left over, this will be paid to the beneficiaries named in your will.

Can you sell a house after equity release?

If you have taken out an equity release plan, you might worry that selling your home is not an option. Fortunately, you can still relocate or downsize.

How much do you pay back on equity release?

In return you'll get a lump sum or regular payments. You'll normally get between 20% and 60% of the market value of your home (or of the part you sell). When considering a home reversion plan, you should check: Whether or not you can release equity in several payments or in one lump sum.

Is equity release a safe option?

Is equity release safe? Equity release products are safe as they're regulated by the Financial Conduct Authority (FCA) and governed by the Equity Release Council (ERC). With lifetime mortgages, you always own your home and any increase in its value is yours.

Is it better to remortgage or release equity?

In general, the more equity you have, the better position you're in because the amount of money you owe compared to the value of your home will be lower. If your initial fixed term mortgage is coming to an end, it can be a good option to remortgage.

How long does it take for equity release to go through?

Depending on the equity release plan you choose, it usually takes between 6 to 8 weeks to release equity in your home, assuming there are no complications along the way.

What is a lifetime mortgages for over 60s?

What is a lifetime mortgage for over 60s? Equity release is a form of mortgaging or remortgaging that allows homeowners aged over 55 to release equity from their homes by taking out a tax-free cash lump sum. An equity release mortgage can help you put aside funds for retirement or buy a second home.

Can you be refused equity release?

Yes, it is possible to be refused equity release. This is because there are key criteria that need to be met, in order to make your application suitable and appealing to a potential lender.

What is the best type of equity release?

Home reversion plans.

Lifetime mortgages are by far the most popular type of equity release scheme, making up the majority of the market. With all lifetime mortgage products you are not obligated to make any payments and will retain 100% ownership of your home.

Do you pay monthly for equity release?

With equity release, you don't have to make monthly repayments. That's because a lifetime mortgage, the most popular form of equity release, is a loan secured against your home which, alongside the roll-up interest, is typically paid back when your plan comes to an end.

How does equity release affect care costs?

Deliberately depriving yourself of assets via Equity Release could result in you having to pay care home fees anyway, so it's not a recommended tactic. ... Equity Release will reduce the value of your estate and could impact your entitlement to certain means-tested benefits, including funding for social care.

What is the maximum you can get on equity release?

The maximum amount you can borrow with equity release is usually up to 60% of the value of your home according to Money Advice Service. The exact amount depends on your age, the value of your property, and the other factors mentioned above.

Is a loan better than equity release?

You may be able to unlock more cash from your home with equity release than if you were to remortgage. This is because you don't have to make any monthly repayments. By contrast, a mortgage lender will only lend you what you can afford to repay each month from your income.

Do you have to be over 55 to release equity?

Can I release equity if I'm under 55? Unfortunately, no. Equity release lifetime mortgages are only available to those aged 55 or over, and you typically have to be older still (aged 60 or even 65) for a home reversion plan.

Can I buy back my equity release?

You can use the sale proceeds of your property to pay your equity release back in full when you move to a new home. However, you may incur an early repayment charge. Moving house doesn't always mean you need to pay your plan back in full.