Aberdeen expert shares the pros and cons of equity release

Equity release specialist at Peterkins Sean Sinclair looks at whether equity release could be used to help with the cost-of-living crisis.

By Sean Sinclair

December 14 2022, 11:45 am

Property opnion: Sean Sinclair, an equity release specialist at Aberdeen based firm Peterkins shares his expert advice on equity release. Photo by Shutterstock.

Could releasing cash from the value of your home be a good way to fund retirement, clear debts or help children with a cash lump sum?

Here Sean Sinclair, an equity release specialist at Peterkins, an Aberdeen-based firm of solicitors, estate agents and financial advisers, looks at whether equity release could be used to help with the cost-of-living crisis.

Sean Sinclair, an equity release specialist at Peterkins shares his expert advice. Image: Sean Sinclair

What is the purpose of equity release?

With the cost of goods and services rising faster than any point within the last 40 years, and with house prices generally rising faster than incomes, it is maybe not surprising that more people are choosing to release equity from their homes than ever before.

Equity release allows homeowners aged 55 and over to release part of the value of their home, as either a tax-free lump sum or as an additional tax-free income.

Monthly payments are often not required as the monthly interest charges are generally allowed to be added to the balance.

Interest accrued is repaid upon final sale of the home.

The original amount released plus interest accrued is repaid on ultimate sale of the home.

As monthly repayments are not required, an applicant’s income and credit history are usually not an obstacle to releasing equity.

Many lenders do however allow interest to be repaid monthly which may be sensible if budget permits.

This will prevent the balance of the debt from increasing over time.

Some products also allow partial repayment without penalty, whilst others also allow full repayment after an initial period.

This may be suitable for those with a shorter-term financial need.

One-off lump sum

Homeowners can opt to release either a one-off lump sum, or to also arrange a reserve facility for future drawdown, potentially as a regular monthly income.

Some homeowners are opting to fund home improvements to reduce their energy consumption, such as upgrading windows and fitting more efficient heating.

Homeowners could fund home improvements, such as upgrading windows and fitting more efficient heating. Image: Shutterstock

Whereas drawing regular instalments from a reserve facility can help those with insufficient income to meet their day-to-day living costs.

There are many considerations and some pitfalls to be aware of; releasing equity and putting it into savings can adversely affect entitlement to pension credits and some means-tested benefits.

Local authority or government grants may be available to help pay for some home improvements.

Expensive way to borrow

Equity release can be a comparatively expensive way to borrow, especially if opting to add interest payments to the balance – in this instance, the interest itself will attract interest and cause the balance of the debt to rise exponentially over time.

All equity release products allow the homeowner to remain in the property until they pass away or enter permanent residential care, providing they meet the conditions of the offer.

Seek advice

The debt will reduce the amount of equity within the home and the value of the estate, which can help reduce an inheritance tax liability if one exists yet will also reduce the amount available for inheritance.

As such, it may be desirable to discuss plans with family and involve them in the process.

It is also a requirement that borrowers seek independent legal advice.

In the first instance, I suggest speaking with an equity release adviser to help consider the pros and cons and all available options.