Is equity release as bad as people say? Discover the pros, cons, myths, risks, and benefits of equity release to decide whether it is right for your retirement plans.
Equity release often divides opinion. Some people see it as a useful financial tool that enables them to unlock money tied up in their property, while others view it as expensive, risky, and something best to avoid completely.
Search online and you will easily find stories warning people against equity release, as well as examples of homeowners who say it transformed their retirement.
So, is equity release as bad as people say? The reality is more balanced than most people think. Equity release is not universally good, nor is it universally bad. Whether it will work well or not for you depends n your circumstances, goals, and understanding of the long-term impact.
To help you make your mind up about equity release, we look at the advantages, disadvantages, and common misconceptions surrounding equity release.
What is equity release?
Equity release allows homeowners, typically aged 55 or over, to access some of the value tied up in their property without having to move home. The two main forms of equity release are:
- Lifetime mortgage: A lifetime mortgage involves borrowing money secured against your home while keeping ownership of the property. The loan and accumulated interest are usually repaid when the homeowner passes away, the property is sold or long-term residential care becomes necessary.
- Home reversion plan: With a home reversion plan, you sell part or all of your property to a provider in exchange for a lump sum or regular payments while continuing to live there.
Both options enable you to access the money tied up in your property, but they work differently and have different long-term implications. You can read more about equity release here.
Why equity release has a bad reputation
Equity release has not always had the best reputation. Earlier products, particularly decades ago, sometimes included restrictive terms and lacked some of the consumer protections that exist today.
There are several factors that have contributed to negative perceptions of equity release.
Compound interest can grow quickly
One of the biggest concerns about equity release is how interest can accumulate over time. If no repayments are made, the interest is often added to the balance each year, which means that future interest is charged on previous interest – this is compound interest.
For example, let’s say you initially release £50,000 with an interest rate of 5% and make no repayments, in 15 years the amount you owe could be £105,685. When it comes to selling their home to repay the loan, people are sometimes shocked by how much of its equity is needed.
Reduced inheritance
Equity release can reduce the value of your estate when you die. Because money is being taken from your property wealth in advance, it can leave less for your family when your home is eventually sold. For some people this is a major consideration.
Fees and costs
Equity release can involve a number of fees and costs, including:
- Advice fees
- Valuation fees
- Legal fees
- Arrangement costs
These additional expenses can make the process feel expensive when compared to standard borrowing options.
Why equity release is not always bad
However, despite concerns, there are reasons why many homeowners choose equity release.
You can access cash without needing to move
Some people have significant wealth tied up in property, but relatively limited retirement income. Equity release can give them much needed money to spend on:
- Home improvements
- Repaying debts
- Daily living costs
- Supporting family
- Holidays and treats
- Care expenses
This allows homeowners to remain in familiar surroundings while accessing money that would otherwise remain inaccessible.
Modern safeguards have improved protection
Today’s equity release plans are very different from older products. They operate under a completely different set of rules and standards that combine Financial Conduct Authority (FCA) regulation and consumer protections introduced by the Equity Release Council (ERC).
Today, any adviser recommending a lifetime mortgage has to hold an appropriate qualification – specifically the Certificate in Regulated Equity Release (CeRER) or equivalent – and must be authorised by the FCA to provide advice. Most reputable lenders and advisers also follow ERC standards, which include a guaranteed right to remain in your home for the rest of your life, or until you move into long-term care.
And finally, the no negative-equity guarantee today means that you will never owe more than the value of your home, as long as your property is sold for the best price reasonably obtainable. Modern lifetime mortgages are also much more flexible than anything available in the earlier market.
However, it is still important to do your research and make sure you are fully informed before buying any product, and only do with a reputable company.
There are flexible repayment options
As mentioned, many newer equity release plans are much more flexible, and allow voluntary repayments that can help control the growth of interest. This can make equity release more manageable than people sometimes assume.
When is equity release a good idea?
Equity release may be worth considering if:
- You want to stay in your current home
- You have substantial home equity
- You need additional retirement income
- Other borrowing options are limited
- You understand the long-term costs involved
For some homeowners, equity release offers financial flexibility that improves their quality of life during retirement.
When is equity release not a good idea?
Equity release may be less suitable for you if:
- Preserving your estate for inheritance is a major priority
- You have alternative income sources
- You may move home soon
- You can meet your financial needs through savings or conventional borrowing
Because equity release affects your long-term finances, it is important to compare all available options.
Common myths about equity release
“The bank takes your home”
This is one of the most common misconceptions. However, with lifetime mortgages, homeowners usually remain the legal owners of their property.
“You can end up owing more than your home is worth”
As covered, many regulated products today include protections designed to prevent debts exceeding your property’s eventual sale value.
“Equity release is only for people struggling financially”
Some homeowners use equity release strategically rather than out of necessity. Some examples include funding retirement experiences, paying off debt, helping children onto the property ladder, renovating homes, and improving cash flow.
Is equity release as bad as people say?
The simple answer is no – modern equity release plans are not usually as bad as people say. But that doesn’t automatically make them the right choice for everyone, either.
Equity release earned criticism in the past for very good reasons, particularly regarding increasing debt balances. However, today’s equity market includes stronger protections for consumers, and more flexible options than many people realise.
For some homeowners, equity release offers a much-needed way to unlock wealth and improve their retirement finances. For others, other approaches such as downsizing, savings, or traditional lending may be better solutions.
If you’re considering equity release, don’t be put off by historic headlines, or the opinion of others. Instead do your own research, understand both the advantages and drawbacks before making a decision.
