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Equity release is an option for homeowners who want to unlock some of the wealth tied up in their property without selling it.
It’s most commonly used by those looking to improve their retirement finances, pay off debts, or help family members.
While the idea of accessing tax-free cash from your home is appealing, the safety and long-term impact of equity release are key considerations.
By understanding how equity release works, the protections in place, and the alternatives available, you can decide whether it’s the right option for you.
Is Equity Release Safe?
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What is Equity Release and How Does it Work?
Equity release allows homeowners over 55 to borrow money against their home while continuing to live in it.
The loan is repaid when the homeowner passes away or moves into long-term care. There are two main types of equity release:
1. Lifetime Mortgages
A lifetime mortgage is the most common type of equity release. It works by securing a loan against your home, with interest rolled up over time.
You can choose to receive the money as a lump sum, in smaller payments, or as a combination of both.
Unlike a standard mortgage, you are not required to make monthly repayments, although some products allow voluntary payments to reduce the growing interest.
The loan is repaid when the property is sold, either when you pass away or enter long-term care.
2. Home Reversion Plans
A home reversion plan involves selling a percentage of your property to a provider in exchange for a lump sum or regular payments.
You retain the right to live in the property rent-free, but when it is eventually sold, the provider takes their share of the proceeds.
While this option guarantees access to funds, the amount received is usually much lower than the property’s market value, making it a less popular choice compared to lifetime mortgages.
What Protections Are in Place for Homeowners?
Concerns about safety are understandable, but equity release products have strict protections to ensure homeowners are not put in a vulnerable position.
Regulation and Consumer Protection
Equity release products are regulated by the Financial Conduct Authority (FCA), ensuring that lenders follow strict guidelines designed to protect consumers.
In addition, providers that are members of the Equity Release Council (ERC) must adhere to key safeguards, including:
- A no negative equity guarantee, meaning you will never owe more than the value of your home, even if house prices fall.
- The right to live in your property for life, as long as you comply with the terms of the loan.
- Fixed or capped interest rates on lifetime mortgages, so repayments do not spiral out of control.
- The ability to make voluntary repayments with some plans, helping to manage the loan balance.
Choosing a product from an Equity Release Council member ensures that these protections apply to you.
Potential Risks and Considerations
While equity release is a safe and regulated financial product, it is not without its risks. Some of the main considerations include:
Impact on Inheritance
One of the biggest concerns with equity release is that it reduces the amount of inheritance you can leave behind.
As interest builds up over time, the remaining equity in the property may be significantly reduced when the loan is repaid.
To manage this, some providers offer inheritance protection, allowing you to ring-fence a portion of your home’s value for your beneficiaries.
This can be an important feature for those wanting to leave something behind for loved ones.
Effect on Benefits
If you receive means-tested benefits such as Pension Credit or Council Tax Reduction, releasing equity could impact your eligibility.
Receiving a lump sum may push your savings above the threshold for these benefits, reducing or eliminating your entitlement.
A mortgage advisor can assess whether equity release would affect your benefits and help you explore ways to structure the funds to minimise this impact.
Growing Debt from Compound Interest
With a lifetime mortgage, interest is added to the loan and compounds over time. This means the amount owed can grow quickly if no repayments are made.
Some plans allow for interest repayments to prevent the loan from increasing, so exploring different options is important.
Future Housing Options
Equity release can affect your ability to move home in the future. While many providers offer portability, allowing you to transfer the plan to a new property, restrictions may apply.
Certain property types may not be accepted, so it’s important to check how this could affect you if you plan to move later on.
Alternatives to Equity Release
Equity release isn’t the only way to unlock the value of your home. Depending on your situation, other options may be more suitable:
Downsizing and Bridging Loans
Selling your home and moving to a smaller, more affordable property could free up cash while reducing ongoing costs like maintenance and energy bills.
One challenge homeowners face when downsizing is managing the gap between selling their current home and purchasing a new one.
A bridging loan can help by covering the shortfall, allowing you to buy a new property before selling your existing one.
This can provide more flexibility if the right home becomes available before you’ve completed your sale.
Standard Purchase Mortgages
If you’re considering moving to a new home, a standard purchase mortgage could be an option, even if you’re borrowing past the age of 50.
Many lenders now offer mortgage products tailored to those in their 50s, 60s, and beyond, with terms designed to suit different income sources, including pensions.
Whether you’re moving to a home that better suits your needs, relocating to be closer to family, or simply want a change of scenery, there are still plenty of mortgage solutions available.
Speaking to a mortgage advisor can help you explore your options and find a lender that matches your circumstances.
Remortgaging
If you already have a mortgage and want to release funds, remortgaging could be a viable alternative to equity release.
Borrowers past the age of 50 still have access to a range of mortgage options, including products designed for those with pension income or other assets.
Some homeowners remortgage to access a lump sum, reduce monthly payments, or switch to a more suitable deal.
Depending on your financial position, this could be a more flexible option than committing to an equity release product.
Retirement Interest-Only Mortgages (RIOs)
A retirement interest-only mortgage allows you to borrow against your home while making regular interest payments.
Unlike equity release, the loan amount does not increase over time as long as payments are made, helping to preserve inheritance.
Using Savings or Investments
If you have savings, pensions, or other investments, it may be worth considering whether these funds could be used before committing to equity release.
A financial advisor can help you explore the best ways to access your money.
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Is Equity Release Right for You?
Equity release is a safe and regulated financial product, but whether it’s the right choice depends on your circumstances.
For some homeowners, it provides the freedom to enjoy a more comfortable retirement, clear debts, or support loved ones. For others, alternative options may be a better fit.
Before making any decisions, speaking to a mortgage advisor can help you weigh up the benefits and risks.
At UK Moneyman, our mortgage advisors take the time to understand your needs and explain your options in detail.
If you’re considering equity release, getting tailored advice can provide clarity and confidence in your next steps.
