Equity release can allow eligible homeowners to access money tied up in their property while continuing to live in their home. However, these products can have significant long-term consequences that are important to understand before making a decision. MoneyHelper explains that equity release can affect inheritance, means-tested benefits, future care plans, and the ability to move or change arrangements later.
A lifetime mortgage is secured against your home. With a roll-up arrangement, interest may be added to the balance rather than paid regularly. This means the debt can grow over time because interest may accumulate on both the original borrowing and previously added interest.
Important considerations include:
The Financial Conduct Authority has warned that the long-term effects of rolled-up interest need to be clearly understood before entering a lifetime mortgage.
One of the biggest concerns for some homeowners is the effect on the value eventually passed to beneficiaries. Borrowing against a property reduces the amount of home equity that may remain after the plan is repaid.
The potential impact depends on:
MoneyHelper explains that equity release can reduce inheritance because the outstanding borrowing and accumulated interest are normally repaid from the property's eventual sale.
Accessing money from your home can potentially affect eligibility for some means-tested benefits, grants, or local authority support. It can also reduce the amount of housing equity available for future care needs.
Before considering equity release, think about:
MoneyHelper recommends considering the potential effect on benefits and future plans before proceeding.
Equity release can involve several costs in addition to interest. Depending on the plan, there may be advice, valuation, legal, application, or arrangement fees. Early repayment can also result in substantial charges under some contracts.
Review:
The FCA has highlighted cases where consumers faced significant early repayment charges after circumstances changed.
An equity release plan is generally intended as a long-term arrangement. Changes in circumstances can make it more difficult or costly to alter the plan later.
Potential restrictions can involve:
MoneyHelper notes that some equity release agreements can be difficult to change and may include early repayment charges.
For this reason, future plans should be considered before taking out a plan.
Equity release is a significant financial decision, so comparing alternatives can be just as important as comparing individual products. Possible alternatives may include downsizing, other later-life mortgage options, or using existing savings, depending on circumstances.
Before proceeding:
MoneyHelper states that regulated specialist advice is required when choosing an equity release product.
The main pitfalls of equity release include accumulating interest, reduced inheritance, potential effects on means-tested benefits and care support, fees, early repayment charges, and reduced flexibility later in life.
Equity release can be appropriate for some homeowners, but it is a complex long-term financial commitment. Comparing alternatives, understanding the full costs, and obtaining regulated specialist advice can help you assess whether the arrangement fits your circumstances.