By Tom Philips at April 15, 2023

Equity Release or Bank Loan? Which is Best?

Equity release is a way of taking out a secured loan without having to make repayments on it.

You release the funds from your home, which means you do not need to have a high income or a good credit rating to qualify, as the money is secured against your property.

To release equity, you need to be at least 55 years old with a home that is worth £70,000 or more. You must not have an existing mortgage, or you must have a way of paying it off, even if this requires using an equity loan.

There are a few different types of equity release, but this article will primarily focus on lifetime mortgages. This is because they are by far the most popular equity release product, so most information you find online will relate to lifetime mortgages.

There are also home reversion plans, which have slightly different requirements and different pros and cons, but you can find out more about this by heading to our home reversions post.

What is a Bank Loan?

A bank loan is money you borrow from the bank that needs to be paid back by a certain deadline. There are different types of bank loan, and today we are going to introduce you to secured bank loans and unsecured bank loans.

Secured loans are loans that are given based on your assets. In other words, you must prove you have certain assets to receive this loan, rather than proving that you have a certain amount of money.

A common example of this is a mortgage; you are borrowing money against your home.

Unsecured loans are not attached to your assets, so instead, they are usually linked to your income and credit rating.

The lender must be confident that you will be able to repay the money by a certain time, as they will not have anything to physically take away from you (i.e. a house) if you do not repay in time. An example of an unsecured loan is a credit card.

One similarity between secured and unsecured loans is that they require you to repay the money by an agreed deadline. Usually, this involves making monthly payments over a certain period of time.

However, with unsecured loans, the interest is usually fixed, so you will be guaranteed to pay back the same amount each month. On the other hand, the interest rate on secured loans can vary, so you may find that you are paying back a different amount of money each month.

If you cannot repay the money on time for a secured loan, your asset (e.g. your home) could be taken away. The situation with an unsecured loan is different depending on the lender and the plan, but it often involves financial penalties, and your credit score may be negatively affected.

As you can imagine, you can usually borrow larger amounts of money with a secured loan, as the lender is more confident to do this with the knowledge that they could take away your assets if you do not repay.

For this same reason, the loan terms tend to be longer with secured loans, and the interest rates are often lower.

On the other hand, there are often fees involved with taking out a secured loan, whereas it is likely that you will be able to get an unsecured loan for free, or for a very small fee.

Another advantage is that you can get this loan very quickly, so it is ideal for people in a desperate situation. You can also take out the loan without needing to own valuable assets.

Secured loans tend to be used for expensive projects such as home renovations or paying off debts. Unsecured loans can also be used for this, but they tend to be used for one-off purchases like holidays and cars, or events like weddings.

There is no correct option when it comes to choosing between secured and unsecured loans, but you need to do your research to discover which one is right for you. Consider some of the following things:

Do you have any valuable assets?
Do you have the means to pay back money quickly?
What do you need the money for?
What is your credit score?

As well as considering this privately, it would be sensible to speak to a financial adviser and find out whether they think you would benefit more from a secured or unsecured loan.

Pros Of Equity Release

Firstly, if you are in retirement and you want to release equity, you will not be discriminated against. With traditional loans, your age and the fact that you are no longer working can prevent you from borrowing money.

However, this is never the case with equity release. You can borrow money whether you are still working or not, and as long as you are over 55, you are eligible.

Certain lenders do have maximum age limits, but it is very easy to find a lender without this restriction.

In fact, not only can you take part in equity release as an older homeowner, but you are eligible for certain benefits that younger homeowners cannot get. For example, your lender may offer you a larger loan or lower interest rates.

Secondly, equity release is a secured loan, which means you do not have to have a lot of money or a great credit rating to release funds from your property.

If you are in a tricky financial situation in retirement, as long as you own a home worth £70,000 or more, you qualify for an equity release loan.

This makes equity release a very accessible scheme, as it is not just reserved for people with lots of savings and a secure job, but instead, it welcomes homeowners who are cash poor and do not have another way to fund their retirement.

Finally, you do not have to pay back the equity release loan by a particular deadline. You can be an equity release customer for the rest of your life, benefitting from the loan, without making a single repayment. This means you can release equity even if you have no other sources of income.

On the other hand, equity release is very flexible, so if you did want to make repayments, you could choose to do this by taking out an interest only lifetime mortgage or a voluntary repayment lifetime mortgage.

Cons Of Equity Release

Firstly, with the lack of repayments comes a huge amount of interest. Though you can safely avoid repayments without worrying about financial penalties, you have to keep in mind that compound interest is a big part of the equity release scheme.

This means that you are charged interest on your loan each year, but you are also charged interest on last year’s interest amount.

Some people avoid equity release for this reason – they are not comfortable with the prospect of being in so much debt, even if they are not required to repay it.

Secondly, it costs money to take out equity, which makes it more expensive than getting an unsecured loan.

You have to pay to make an application, to meet with a solicitor, to get a property valuation, and for various other processes that are essential to the equity release scheme. This can also be time-consuming.

If you are still working, you may find it difficult to make time for all the appointments you need to attend and the emails you need to reply to. However, if you are retired, you may not have the money to pay for the equity release fees.

Finally, we have mentioned that equity release is very accessible in the sense that it is open to people with a low income. However, it is not a scheme that welcomes people who are not homeowners, or whose property is lower than £70,000 in value.

This means that plenty of pensioners may struggle to qualify for equity release, as they may not own a home, or their home may be low in value.

What’s more, if someone is under 55, they cannot release equity under any circumstances.

Pros Of Bank Loans

Firstly, bank loans are not a long-term scheme like equity release is. Though this comes with its disadvantages, it means that you can get a bank loan as a means of bridging finance, and when you have paid the loan back, you will not be in debt any longer.

This means that you do not have to worry about compound interest in the same way that you do with equity release.

Getting a bank loan is an easy way to fund something in your life without having to commit to following the rules of a scheme for the rest of your life.

Secondly, if you are after an unsecured bank loan, you do not have to have valuable assets to be able to borrow money from the bank.

This appeals to pensioners who do not have high-value homes, but would pass the affordability criteria for a standard bank loan.

Finally, it is possible to get a bank loan without paying any money, until you need to start making repayments.

With equity release, even if you go back on your decision, you have already invested money into the scheme.

However, with a bank loan, there is less of a permanent impact on your finances as it is usually free to obtain, and once you have repaid the money, you no longer need to worry about it.

Cons Of Bank Loans

Firstly, you have to stick by the deadlines that the bank has given you. This means that you have to be confident that you will be able to repay the money, and not every pensioner is in the position to pay back money on a short-term basis.

What’s more, you never know how your financial situation may change as you get older. If you have taken out a bank loan and then there is an emergency, you may struggle to repay the money as you would have to prioritise something else in your life.

Secondly, it can be very difficult for pensioners to be eligible to borrow money from banks.

When you are no longer working, it is harder to prove that you have a stable income, as you are living off finite funds, such as your pension and savings, if you are lucky.

Furthermore, banks are less likely to lend money to people in their later life as there is more chance that they will pass away before they have repaid the debt.

To give an example of this, four of the biggest banks – Nationwide, Lloyds Banking Group, Halifax, and Santander – will not lend money if the mortgage term is going to extend beyond the borrower’s 75^th birthday (1).

Finally, as we have discussed, unsecured bank loans are usually used as a temporary solution for people who need to fund something specific.

This means that it may not be worth it to get a bank loan if you are looking to change your entire financial situation in a permanent way.

You will not access as much money as you could with equity release, and you would need to be able to pay back the money fairly quickly.

Equity Release Or Bank Loan – Which is Safer?

Due to the negative media attention that equity release gets, it is believed that equity release is not a safe scheme. We do not want to deny that it can be risky to take out equity, but if you find a reliable lender, that is regulated, the scheme will be very safe.

This is because regulated equity release lenders have to follow a certain set of standards proposed by the Equity Release Council.

For example, they have to provide a no negative equity guarantee, and they have to have interest rates that are either fixed or capped at a certain amount.

This means that when you take out equity with a regulated equity release lender, you can rest assured that you are entitled to certain benefits, and if they are not provided to you, you can complain to the regulatory body.

Having said that, just because equity release is safe when it is regulated, this does not mean that people do not end up in a worse financial situation when they take out equity.

If you jump into the scheme without weighing up your options, it is possible that you’ll end up in a lot of debt that you could have avoided.

You should always meet with an equity release adviser before making an application to a lender, as the advisor will be able to tell you if they believe you would be worse off if you release equity.

They will only be able to tell you this when they know your financial situation and your plans for equity release.

As for bank loans, they are very safe as they have been used for a very long time, and it is very easy to find a reliable lender.

The fact that the loan is short-term means that you are not getting into irreversible debt, as you need to be able to prove that you can repay the money before you are even given the loan.

In terms of which is safer between equity release and bank loans, it depends on the person who is borrowing the money. We would generally argue that if you have the money to repay a short-term loan, and if you only need the money for a one-off expense, a bank loan would be the safer option.

However, if you are looking for a long-term fix to your situation, and you are not in the position to make repayments on a loan, please know that it is certainly possible to release equity in a safe way.

We recommend taking a look at our article on whether equity release is safe, which will give you tips on how to make sure you are not scammed by a lender.

Equity Release Or Bank Loan – Which is More Accessible?

Overall, we would argue that equity release is more accessible than a bank loan. This is because many pensioners struggle to take out loans, whereas they would not struggle to take out equity for the same reasons.

The age and their income do not affect their ability to release funds from their home.

Yet, you could argue that equity release is not widely accessible, as being a homeowner is a prerequisite for this scheme.

What’s more, customers must have properties of a certain value, and it is preferable that these properties are in a good condition and a good location.

For this reason, bank loans are more accessible to people who do not have valuable assets, but who have a stable income.

On the other hand, equity release is accessible to people who do not have a high income, but have a valuable property.

Perhaps equity release could be viewed as more accessible as you can still take out equity even if you have a high income, whereas you cannot get an unsecured bank loan if you cannot prove that you earn enough money.

Equity Release Or Bank Loan – Which is More Profitable?

Again, we cannot say which one is more profitable until we know your personal situation.

Generally, if you have saved a decent amount of money for retirement, it would be better to get a bank loan.

This is because there is no point getting into significant debt with equity release if you can borrow money on a short-term basis and then rely on your overfunds on a day-to-day basis.

However, if you do not have enough money to get through retirement, there is no doubt that equity release is more profitable than a bank loan.

This is because you can access a much larger amount of money that does not need to be repaid. The money is also tax-free, so you get the full benefit of it, and you can spend it freely without having to budget in order to pay it back.

Equity Release Or Bank Loan – Which is Better For Pensioners?

Equity release is likely to be better for pensioners as it is much easier for them to qualify for an equity loan than a bank loan.

It is also money that can help them throughout their entire retirement, as once you take out equity, you are expected to remain an equity release customer for the rest of your life.

You can use your equity release funds for anything at all, which means you can choose to use the money to make your retirement as enjoyable as possible.

You can do this by saving up the money to fund your care costs, paying for home improvements to make your home suitable for retirement, buying something practical such as a new car, or spending the money on something you have always wanted, such as a luxury holiday.

If you can get your hands on a bank loan as a pensioner, do not rule out this option as a way of boosting your retirement income. However, is only the superior option if you have something in mind that you want to spend your money on, and you are otherwise financially comfortable.

For example, if you cannot afford to get a brand-new car, so you take out a loan in order to fund this, but you have sufficient funds for your day-to-day life.

Equity Release Or Bank Loan – Which is Better For Inheritance?

Most people would agree that getting a bank loan is better for your family’s inheritance. This is because you repay the money that you borrow, so it does not affect the amount of money you can leave to your family when you pass away.

Having said that, if you die without having paid off all of your debts, the money will be taken from your estate, which means that fewer funds are passed on to your loved ones. Generally, if there is not enough money in your estate took over the cost of the bank loan, it will be written off.

As for equity release, it is well known that it can negatively impact inheritance. When you take out equity from your property, you are reducing the value of your estate, which means that your family will not be able to inherit as much money.

What’s more, if you do not make regular repayments on the interest or the loan amount, you will owe a huge amount of interest by the end of the scheme.

This means that the equity release lender will have to take more money from your estate, and if there is not enough to take, your family may be responsible for repaying the debt.

Having said that, there are now many ways that you can ensure your family still get an inheritance when you release equity.

One way is to request inheritance protection, which saves a portion of your funds for your family, and the equity release lender is not allowed to touch these funds (2).

Another way is to ensure that your equity release lender is regulated, which means that they will have to have a no negative equity guarantee.

This means that if your debt exceeds the amount of money that you borrowed, the remaining debt will be wiped, and your family will not have to pay a single penny towards your loan.

Equity Release Or Bank Loan – Which is Better For Non-Homeowners?

It cannot be debated that a bank loan is better for non-homeowners. This is because you simply cannot take out equity if you do not own your own home.

Equity release is a secured loan, so the lender must be able to lend you money with the knowledge that they can take the home if you do not repay it all. This is obviously not possible to do if you do not have a property offer up in the first place.

If you take out a bank loan, there is no obligation for you to own your own property. It may be in your favour if you do own a property, as it is additional proof that you are capable of borrowing money reliably, but it is not crucial.

What’s more important is that you can prove that your income is reliable, and that your history of repaying debt (often demonstrated by your credit score) is trustworthy.

Getting Equity Release

We hope that you now understand the pros and cons of equity release, and how they differ from the pros and cons of getting a bank loan.

The decision will not be easy, but it would be made much easier by speaking to a professional equity release adviser, you can do this by calling us on 0330 058 1579 and asking us about our free initial consultation for new equity release customers.

We want to reiterate that equity release is not for everyone. If you have funds that you can rely on for the rest of your retirement, and you are only after a short-term loan, we recommend that you stick to getting an unsecured bank loan.

The debt that comes with equity release is only worth it if you do not have enough money for retirement.

On the other hand, if you are eligible for equity release, and you believe it is just what you need to make your retirement comfortable, we are happy to go into detail about how equity release can change the lives of homeowners.

The amount of money that you can access through equity release it’s extremely impressive compared to other schemes, particularly if you have a high value home.

You can find out how much money you could release through this scheme without even speaking to an adviser, though you must be aware that this is a vague estimate, and an adviser would be able to provide you with an accurate quote.

You do this by using an equity release calculator, which determines how much money you could borrow based on how old you are, whether you have a house or a flat, and how valuable the house or flat is.

Part of the equity release process is finding out how valuable your property is, so don’t worry if you are not sure what the exact value is.

After you make an application for equity release, the lender will request that you have a property valuation, and this will help them to make a decision on whether or not to lend you money.

Generally, if your property is above the minimum value requirement, you will be approved for a loan.

However, keep in mind that the condition of your property is something that is important to lenders, so if it is in particularly poor condition, your equity release application may be rejected.

What’s more, if you have a leasehold property or a retirement apartment, it may not necessarily be accepted by a lender, as they do tend to prefer freehold properties,

We still encourage you to get involved with equity release with a leasehold or retirement property, as different lenders have different requirements, so you may be able to find a lender that does not exclude these properties.

You can find this out before you even make an application, which will save you time and money, as a professional equity release lender will be able to tell you whether you qualify for the scheme, or whether you need to look into alternatives.

If you are interested in the scheme, and you believe that you are eligible, do not hesitate to reach out to us as soon as possible, as more and more customers are choosing equity release every day, and this is lengthening the time it takes to release equity.

If you call us today, and we decide the equity release is right for you, you could receive your funds in a matter of 6 to 8 weeks.

References

[1] Why are lenders so reluctant to lend to older people? https://www.moneymarketing.co.uk/analysis/why-are-lenders-so-reluctant-to-lend-to-older-people/

[2] Equity release: what happens to my plan on death? https://www.unbiased.co.uk/life/pensions-retirement/equity-release-what-happens-to-my-plan-on-death