Pros & cons of equity release

With any form of finance, be it a car loan, house mortgage or even a student loan, there are some points you should consider before proceeding.

Benefits of releasing equity from your home:

• The money you release is completely tax-free.
• You can stay in your home without having to downsize or move to a cheaper area.
• You can protect an inheritance for your family.
• Most lenders offer a no negative equity guarantee (NNEG) so you'll never owe more than the value of your home when it is sold.
• There's no need to repay the loan until you and your partner pass away or both of you have moved out of your home and into long-term care.
• If you wish to repay some of your loan early, there are usually options available for you to choose from.
• After taking equity release, you can still move house.

Some cons to consider:

• The inheritance you leave will be reduced.
• Releasing equity may impact your entitlement to means-tested state benefits. Unfortunately, such is the means tested nature of benefits as a whole these days, if you release equity and have a large chunk of money sitting in your account as a result, then your state benefits might be affected. If this impacts you, get advice before proceeding.
• If you gift some of the money to family, they might have to pay Inheritance Tax in the future.
• Interest on a Lifetime Mortgage is calculated daily and added to the amount you owe each month. This means that the amount you owe will quickly increase over time, reducing the equity left in your home.
• If you pay back some of the loan early, you may be subject to an Early Repayment Charge.

Costs of equity release

Like any form of finance, equity release is a big decision and like any big financial decision there are processes and rules in place to ensure that you're making the right choice for you. As part of your application for equity release there are a few things that you will need to do and costs that you will incur along the way (just like taking out any other mortgage).

Valuation Fees: Depending on the type of property, this can range from just an inspection through to a full survey.

Arrangement Fees: These can range from £500 - £3,000 although some providers offer fee-free solutions.

Consultation Fees: It's wise to seek advice from an Independent Financial Adviser, for which you will usually pay a percentage of the loan amount of between 1% and 2%.

Solicitor's Fees: It's wise to seek advice from an Independent Financial Adviser, for which you will usually pay a percentage of the loan amount of between 1% and 2%.

You will likely incur these costs as part of your application process and they ensure you will have received sound financial and legal advice before proceeding. Just like taking out a traditional mortgage, rules are in place to help people make fully informed, sound decisions regarding their finances.

One additional cost may be related to settling your equity release early. Most equity release solutions are designed to be settled when the borrowers have either died or moved into long term care, however, some people may intend to settle the borrowing earlier (perhaps through an expected inheritance for example). In that case, you should find out about any costs associated with settling your loan early. Just like a traditional mortgage, equity release solutions can have early settlement charges. If you're thinking that early settlement might be an option for you then speak to your financial adviser.