Home equity is the current market value of your home, minus any mortgages you haven’t paid off yet. Equity release allows homeowners to take some of the value of their home as cash. This money can be used to pay existing loans or make home improvements. Releasing equity is a big financial decision, and if you’re considering it, it’s worth understanding its advantages and disadvantages. This article explains the pros and cons of equity release
Pros
Here are some benefits of releasing equity:
You receive tax-free cash to spend however you like
This is one of the biggest advantages of releasing equity. You don’t have to pay any tax on the money you receive and you are allowed to spend it however you please. Most people release equity to make improvements to their home, pay off the mortgage or other debts, or supplement income to improve or maintain their lifestyle or help their family, among other things.
You get to stay in your own home
Here’s another reason why most people consider equity release. This financing option allows you to tap into the value of your home without selling it and moving to another place. In other words, you can continue to stay in your family home for as long as you want without worrying about making repairs or modifications in the house. Because of these benefits, equity release may be a great alternative to downsizing, which involves selling your current home and relocating to a smaller, less expensive place, and using the remaining cash for essentials.
You don’t need to make monthly repayments
That’s right! With equity release, you don’t need to worry about repaying the loan or the interest. The amount you borrow will be repaid through the sale of the property after you pass away or move to permanent residential care. However, if you want to keep your debt lower, paying off the monthly interest might be a good idea.
You can access money in multiple ways
Typically, you can choose to receive money from equity release either as a lump-sum payment or a drawdown lifetime mortgage. A lump-sum payment is usually ideal when you have a single big expense that you want to take care of. A drawdown lifetime mortgage, on the other hand, allows you to access smaller amounts of money over time, which is similar to receiving a regular income.
Cons
Here are a few drawbacks of equity release:
Your debt increases
When you take out an equity release loan, the interest is added every year to both the principal amount and the interest that’s already built up. Since most equity release deals are lifetime mortgages that don’t have to be repaid, the amount owed could swell rapidly over the years. However, you can reduce the debt by choosing the interest-only lifetime mortgage option and paying off interest gradually.
Your benefits might be affected
When you unlock cash from your home, the value of your property goes down. If you currently receive certain means-tested benefits, like pension credit, savings credit, or council tax benefit, your eligibility for these benefits can be affected when you release equity. Even if you’re not currently claiming these benefits, you might want to think about whether you’ll need them in the future before proceeding with equity release.
You can only leave a small inheritance
Releasing equity may not be ideal for your loved ones. When you pass away or move out permanently, your home will be sold and your loved one will only receive whatever money remains after the debt and interest have been completely paid off. In most cases, this amount is quite low.
You can’t take out any other loan against your home
Here’s another important downside to consider! Once you have released equity, you can’t use your home as a security to take out any more loans. It’s important to manage the money you receive from equity release well to finance your needs and wants for the long term.
Like most things involving money, equity release has its benefits and drawbacks. Since it’s a big decision for most people, we highly recommend that you carefully consider every advantage and disadvantage of equity release and speak to a professional financial advisor, if necessary, before moving forward.
