Your home could be your most valuable asset. However, unlike other assets, such as ISAs or savings, this value isn’t immediately accessible.
Equity in your home remains stored there until you sell. However, there are methods of equity release that can unlock funds without necessitating a sale.
There are pros and cons to equity release, and it’s important that you consider these carefully before taking any action. Read on to find out more.
Equity release can be used to fund projects, clear debts, or support day-to-day living
Research from Canada Life shows that home improvements are the leading reason people seek equity release, with data indicating that home adaptations or improvements are cited in 43% of applications.
Other reasons included clearing an existing mortgage, strengthening financial resilience, supporting day-to-day living, building emergency funds, and consolidating existing debts.
This demand for equity release reflects the fact that property can often represent a significant proportion of an individual’s wealth.
The most common type of equity release is a lifetime mortgage. Under this type of arrangement, you:
- Take out a loan against your home
- Retain ownership
- Can often choose whether to pay some or all of the interest, but usually don’t make monthly payments
- Repay the loan and any interest when the last homeowner either dies or moves into long-term care.
The potential pros of equity release
You can unlock wealth from your home
As we’ve already mentioned, wealth tied up in property is fairly inaccessible, and this could be frustrating if you have limited income or savings.
Releasing some funds through equity release can supplement income, help to fund large projects, or be put towards clearing debts.
You don’t need to sell your home
One of the big advantages of equity release is that you can remain in your home and don’t need to sell or downsize simply to unlock funds.
You could use funds to support your family and potentially reduce an Inheritance Tax liability
Releasing wealth from your property can unlock funds to help your family financially during your lifetime.
Gifting during your lifetime could also potentially reduce the value of your estate and lower or remove an Inheritance Tax (IHT) liability.
However, there are some caveats to lifetime gifting. Outside of certain HMRC exemptions, such gifts are known as potentially exempt transfers (PETs). If you survive for seven years after making a gift, then its value could be removed from your estate. But if you die within seven years, then the gift will likely become taxable at a rate determined by a sliding scale known as taper relief.
Equity release can be complex and isn’t always a simple way to mitigate an IHT bill. It’s important to take financial advice to understand whether it could be a workable option for you.
Read more in our article Asset-rich, tax-poor: Why it could be worth reviewing the value of your estate.
You could find a plan which offers flexibility
Modern equity release can give you some choice over how you access and pay back money, such as making voluntary repayments or taking the funds over a period of time rather than in a lump sum.
The potential cons of equity release
Compound interest could increase your debt
In some cases, you can make monthly payments against the interest. However, if you can’t afford this, or your plan doesn’t allow for it, then interest will be charged on both the original loan and the previous interest.
The Equity Release Council illustrates this point, with data showing that a £100,000 lifetime mortgage with a 7% interest rate could grow to £200,966 after 10 years if you made no voluntary repayments. After 15 years, the amount you owe could reach £284,895.
It will usually reduce the value of your estate
This can fall into both the pros and cons categories. Reducing your estate could be beneficial if it also lowers exposure to IHT. However, if your estate is unlikely to attract IHT, this reduction could mean your beneficiaries receive a reduced inheritance. This is where strategic estate planning in line with your circumstances is important.
There could be more appropriate alternatives
Equity release can be complex and requires careful consideration. Working alongside a financial planner can help you establish whether you could draw on other assets, such as investments or pension income, as a more appropriate option.
It could affect means-tested benefits
Releasing capital from your property can potentially affect your eligibility for certain means-tested benefits.
Changing circumstances can add complexity
When you take out your lifetime mortgage, you might be sure that you’ll stay in your home forever. However, if circumstances later mean you need to move, there can be some complications involved in transferring an equity release plan.
Get in touch
Accessing your property wealth can often be complex, and it’s important to take advice before considering equity release. We’re always happy to help; please get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.