Taking money out of your property through equity release can have a number of significant implications for tax, benefits, inheritance and your long-term financial planning.
Some key points to consider for equity release in general are:
If you take out a lifetime mortgage or sell a share of your property through a home reversion scheme then you will reduce the amount of inheritance you will be able to leave your loved ones, potentially significantly. Make sure you understand what the total cost of borrowing could be under various different scenarios with our Lifetime mortgage calculator.
The longer an equity release plan is in place, the higher the total cost of borrowing can be. This is because of the compounding effect of the interest you owe starting to be charged on top of existing interest. You can avoid this happening by choosing to pay back the interest monthly on the money you owe. If you don’t do this, the longer your equity release plan is in place, the higher the total cost of borrowing. While no-one can predict the future, the younger you are when you take out an equity release product, the more likely it is that the plan will be in place for a longer period of time.
Taking a cash lump sum through equity release could affect your entitlement to means tested benefits such as Pension Credit, Universal Credit or Housing Benefit. Any money released wll be classed as ‘capital’ in eligibility assessments for means tested benefits which can impact your entitlement to claim them. Read more about how lump sum payments and savings can affect means-tested benefits here.
Ongoing terms and conditions
Your equity release provider will place restrictions and conditions on you continuing to live in your own home. This could be as simple as requiring you to maintain suitable buildings insurance to protect the property, or they could impose restrictions on the type and nature of home improvements you can make. Most will expect you to look after the property and maintain it in a reasonable condition. Always ensure you understand what conditions your lender is asking you to comply with.
Ability to move home
Can you move your equity release plan to a different home if you want or need to? What fees and charges will be payable if you do? What restrictions are there on the type of property you can move to? While many plans are portable, they don’t allow you to move to any property you wish as it will still need to meet your lender’s requirements of a suitable property.
Ability to change your mind
Equity release products can be difficult to unwind or cancel if you change your mind. At best, there may be hefty early repayment charges, in other instances, for example with home reversion, it may be impossible to unwind. This is why it’s a regulatory requirement to seek financial advice before taking out an equity release product to ensure it is suitable for you and you understand the long term implications.
No negative equity guarantee
If you aren’t able to pay the monthly interest on the money you release from your property then the total amount you owe can grow significantly over time as interest starts to get charged on existing interest, compounding the effect. This could even mean that you would end up owing more than the value of your home. Thankfully this can be easily prevented by using a provider who has signed up to the industry trade body, the Equity Release Council who require all their members to sign up to a no negative equity guarantee. It’s therefore essential to only use an equity release provider who has signed up to be a member of the Equity Release Council and follows its code of conduct.
Fees and charges
In addition to the cost of the interest payments accumulating there are a number of additional fees and charges to be aware of. These include a financial advice fee, an arrangement fee to the equity release provider. Property legal and valuation fees; buildings insurance and ongoing property maintenance costs. These can add up to anywhere between £1,000 and 3,000.