Tread carefully if you're thinking about equity release

The equity release market is getting its act together. But the cost means tapping your property for cash should be a last resort for most people. 

Old couple standing outside a house © iStockphotos

The equity release market is booming. Living longer but struggling to save for retirement or running short of money after taking too much out of pensions too early mean more people than ever want to cash in on the value of their house in later life. Equity-release plan providers lent £3.94bn last year, says the Equity Release Council, up 29% on 2017. The size of the market has doubled within a four-year period.

Equity release plans are deceptively simple. Over-55s can borrow against the value of their property typically up to 50% to generate a pot of cash. You can use this money as you like and there are no repayments due. The loan, plus interest, is repaid after your death from the proceeds of the sale of your house, or earlier if you need to sell to move into long-term care.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Equity release can be an attractive proposition for homeowners in need of cash and sitting on a valuable asset, particularly those who are unable or unwilling to free up capital by downsizing to a smaller property. However, there are some big downsides. In particular, equity release plans can prove very expensive.

In part this is because lenders' rates are not as competitive as on standard mortgages, typically priced at 5%-6% a year, according to personal finance data provider Moneyfacts. But the key problem is that since you're not making any repayments, the charges mount up, exposing you to the perils of compound interest. Borrow £50,000 at the age of 60 at rate of 5.1% and what you owe doubles roughly every 14 years.

Advertisement - Article continues below

So any inheritance you were hoping to leave to children can be wiped out. Equity Release Council members all guarantee no negative equity your debt will never be greater than the value of your property but your heirs may get nothing.

Loans become more flexible

However, increased competition in the sector has resulted in better deals, with a fivefold rise in the number of products on offer over the past five years. Rates have come down you can now find fixed-rate deals below 4% and products have become much more flexible. You'll often have the choice of taking a monthly income rather than an upfront lump sum, which reduces the cost of the deal and suits people looking to supplement their income. You may be able to make voluntary capital or interest repayments during your lifetime.

Still, the cost of equity release means it should be a last resort for most people. If you do need to raise additional capital or income later in life, moving into a smaller property will typically be a more economic solution. You should take independent financial advice before signing up for a plan; reputable equity-release providers will often require you to do so. Seek an adviser with a specialist qualification in equity-release advice.



Personal finance

Companies cut back on their pensions bills

Britvic is the latest firm hoping a cheaper inflation index will cut pension costs. David Prosser reports.
28 Aug 2019

Good news for pensions savers from HMRC

HMRC has withdrawn its appeal over breaches of the pensions lifetime allowance.
28 Jun 2019
Personal finance

Equity release: handle with care

Make sure you are getting the right equity release product and are choosing from all the available options.
28 May 2019
Personal finance

Don’t miss the pensions deadline

There are just five weeks left in the 2018-2019 tax year, so make sure you’ve made full use of your allowances.
6 Mar 2019

Most Popular


Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020