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*Updated September 2024*
In this guide, our expert Ashley Shepherd, who has over 30 years' financial services experience, takes a close look at the pros and cons of equity release lifetime mortgages to help you weigh up your options.
With the income needed in retirement continuing to rise, equity release could be a great way of boosting your income, but it’s a big decision.
Ultimately, whether equity release is right for you will depend on your personal circumstances, so always seek professional advice from an independent specialist, such as Age Partnership.
> Lifetime mortgages
> Eligibility
> Equity release FAQs
Equity release could give you more financial freedom in retirement. The main advantage is that it allows you to unlock some of the value of your home as tax-free cash, without having to sell it or move out. Here's a quick summary of the pros and cons of equity release from my perspective.
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Here are the potential downsides of equity release as I see them, in more detail:
A lifetime mortgage works differently to a standard mortgage. With a standard mortgage, you usually make monthly payments over a set period. But with a lifetime mortgage, the money you borrow and the total interest are usually only repaid when you die or go into long-term care.
As a result, lifetime mortgage interest rates tend to be higher. In 2024 interest rates are currently between about 5.5% and 7% AER, although you might be able to find a lower rate if you look around.
Speak to a financial adviser qualified in equity release. They can search the market to find the most appropriate equity release plan for you, and at the best rate. We work in association with Age Partnership, a specialist equity release broker who can compare equity release products from a variety of the UK’s leading providers, many of which offer preferential rates through Age Partnership that you may not find anywhere else.
While the interest rate on a lifetime mortgage is usually fixed, it's 'compound' interest. This means that it is charged on the total amount of the loan, including all the interest that has already built up each year. So every year you're charged interest on a larger and larger sum, which can dramatically increase the total amount owed. Try our equity release compound interest calculator.
The longer your lifetime mortgage lasts, the longer interest charges can continue to build up. In some cases, at the end of the plan, you or your family could end up owing the whole value of your home to the equity release company.
Many equity release providers now offer lifetime mortgages with an option to make voluntary repayments – either monthly or on a flexible ad-hoc basis. This can help to lessen the impact of compound interest.
Also, always make sure your provider is a member of the Equity Release Council. This way your lifetime mortgage will include a “no negative equity guarantee”, ensuring you will never owe more than the value of your property.
When you release equity from your home, you'll receive either a lump sum, regular cash payments or a cash reserve to draw on when needed. In exchange, you agree that the equity release provider will be repaid when you die or move into long-term care. This will probably mean selling your home, so your family will not be able to inherit it – although they will receive any money left over after the sale. Read more about what happens to equity release on death.
Look for a lifetime mortgage that includes an inheritance protection guarantee. This lets you 'ring-fence' a percentage of your home's value, to ensure it will be passed on to your chosen heirs.
As the name makes clear, a lifetime mortgage is a lifelong commitment. If you decide to pay off your mortgage early you could be faced with an early repayment charge, which could be high.
Give careful thought to how and when you’d like to repay your lifetime mortgage. If paying back some or all of the loan as you go is important to you, consider a lifetime mortgage with the option to make penalty-free voluntary repayments, either on an ad hoc or regular basis.
If you're receiving a state pension or universal credit, your benefits may be affected when you release equity from your home as it will increase your income.
On the other hand, your current credit score won't affect your eligibility for equity release – the amount of tax-free cash you can release mostly depends on your age and the value of your property.
Ask the Department of Work and Pensions or Citizens Advice how releasing equity might affect your state pension or entitlement to benefits. Age Partnership's advisers are also qualified to advise you on this.
Always seek independent financial advice before deciding whether equity release is the right choice for you. It's best to consult an equity release qualified adviser, such as the award-winning equity release specialist Age Partnership.
Age Partnership will compare equity release plans and providers from some of the UK's leading companies, giving you a broader view of the most suitable solutions for your unique circumstances.
Hopefully, I've addressed all your questions about the pros and cons of equity release but if you do have any other questions take a look at our FAQs page or get in touch.
To see how much equity you could release from your home, use our free and easy-to-use calculator.
Or for free advice from an equity release specialist at Age Partnership, call 0800 368 8466.
Try our equity release calculator
Read this simple guide to find out exactly what equity release is and how it works, to help you consider your options and decide whether it could be a good choice for you.
Is equity release safe? Learn about the safeguards and strict codes of conduct that providers and advisers must follow to protect consumers’ interests.
Use our free equity release calculator to find out how much tax-free cash you could unlock from your home. Instant, no-obligation quote.
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