What are the pros and cons of equity release?

Simon Stanney

Last updated 28^th February 2024 by Scott Robertson

5 min read

Equity release might be right for you, but it’s important to think about the pros and cons before making any important decisions. While equity release can significantly benefit your quality of life, it is important to understand the potential drawbacks. Take your time and consider your options before making a decision.

There are two main schemes available – lifetime mortgages and home reversion plans. They have different features, so be sure to research which one is best for you.

What are the advantages of equity release?

Regulated equity release schemes are a safe way to access some of the equity tied up in your property. This tax-free cash can be taken as a lump sum or in instalments, and be used however you want.

You'll have tax-free cash to spend however you like

You won't have to pay tax on the money you release. Some of the top reasons people release equity are:

• To pay off their mortgage or debts
• To make improvements to their home
• To top up their income and live more comfortably
• To help their family
• To pay for something for themselves, like a holiday

Find out what you can do with equity release money or how it can help you prepare for the future.

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You get to stay in your own home

Equity release can be seen as an alternative to downsizing, where you sell your current home to move to a smaller, less expensive one and use the difference as you like.

With equity release, there's no need to move. Some people decide to use some of the money they release to make home improvements. This could allow them to enjoy their retirement without worrying about fixing things around the house or making modifications as they get older.

Staying in your home not only means you get to retire in the house you love, but you also won't need to deal with the stress and expense that comes with moving.

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You won't have to make any monthly repayments unless you want to

You won't need to repay the loan or the interest until your home is sold when you (or, for joint policy holders, your partner) die or move out permanently into residential care.

This means that your monthly outgoings won't go up, which may be helpful when organising your finances. Some people, however, like the option to pay off the interest to keep the debt down. If you think this might be right for you, you can opt for an interest-only lifetime mortgage.

Alternatively, you might be able to make voluntary overpayments, usually limited to 10% per annum. You should discuss your needs with a qualified adviser, who will explain your options and recommend what's suitable for you.

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You'll never owe more than the value of your home

Lifetime mortgages provided by members of the Equity Release Council offer a 'no negative equity guarantee'.

This ensures that no debt can be transferred to your family after your home has been sold when you pass or move into long term care.

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You can access the money when you need it

You can choose to take out a lump sum, or with a drawdown lifetime mortgage you can access smaller amounts of cash over time. This can provide a regular income, up to the limit set by your plan provider. You won't be charged interest on the sum until you decide to access it.

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You could avoid paying inheritance tax

Equity release can be a way for you to give your family a cash gift, avoiding inheritance tax.

Inheritance tax rules(www.gov.uk opens in a new tab) can be very complex, so before gifting any money, make sure you seek professional advice.

What are the drawbacks of equity release?

As with many products, equity release has its drawbacks. For instance, it is a loan secured against the value of your property, which means it will need to be paid back when you die or go into permanent care. And the amount of the inheritance you can leave behind will be reduced. Below you can find some other considerations.

Your debt is increased by interest

Because of the effect of compound interest. This is where you pay interest on the original loan amount plus the interest that’s already been added to the loan.

As a lifetime mortgage doesn't have to be repaid until you die or go into long term care, the amount owed could grow rapidly over the years.

You could reduce this debt by opting for an interest-only lifetime mortgage, or choosing to make voluntary overpayments if permitted by the lender.

Read our article on how much equity release costs to find out more.

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Your benefits might be affected

Unlocking cash from your home will reduce the value of your estate and, by maintaining any unspent funds, you could affect your current and future eligibility for means-tested state benefits – such as Pension Credit, savings credit or even council tax benefit.

Even if you're not entitled to these benefits now, think carefully about whether you may need them in the future.

Take a look at 'How does equity release affect benefits and state pensions?' for more information.

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You might be subjected to early exit fees

A lifetime mortgage is a lifelong commitment. If you decide to pay it off early, you may have to pay a redemption fee. Always check what charges may apply.

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You can't leave your home as an inheritance

With the majority of plans, when you die or move out permanently, your property may need to be sold to repay the scheme provider first. Only any extra money left over afterwards will go to your estate to leave as an inheritance.

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You may have to pay set-up fees

Depending on your provider, you may have to pay arrangement fees and for professional advice. (But you can get free initial advice with the SunLife Equity Release Service.)

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You won't be able to take out another loan against your house

Once you've taken out equity release, no other loans can be taken out using your home as security. If there is remaining equity in the property, some providers may allow you to take more equity later.

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Next steps

If you're wondering if equity release is safe, or looking to find out how much equity you could release, our in-depth articles will be able to help.

There's a lot to consider, so it's important to get professional advice. This can be from a specialist adviser, a solicitor or both to help you decide if it's the right option for you.

The thoughts and opinions expressed in the page are those of the authors, intended to be informative, and do not necessarily reflect the official policy or position of SunLife. See our Terms of Use for more info.