Equity release is a way of unlocking some of the wealth tied up in your property without having to sell your home.
It is a popular option for many homeowners aged 55 and over, who released £2.6 billion in property wealth in 2023 through this type of scheme, according to latest figures from the Equity Release Council, the trade body for the sector. Over 26,000 new equity release plans were agreed last year alone.
Equity release could provide you with a lump sum, regular income payments or a combination of both and some products may allow you to continue to benefit from any increase in the value of your property. Any money released, plus the interest that builds up on it, then gets paid back either when you die, or move into long-term care
However, there are several downsides to consider, not least that you’ll reduce the value of any inheritance you might have planned to leave loved ones, and any means-tested benefits you claim could be affected.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
This guide explains how equity release works to help you decide whether it could be an option worth considering.
Contents
- How equity release works
- Who can access Equity Release?
- Types of Equity release – Lifetime mortgages and Home reversion schemes
- How much can you borrow and what might it cost?
- Do you pay tax on equity release?
- Pitfalls to be wary of
- Possible Alternatives to Equity Release
- Getting financial advice on Equity Release
How equity release works
Equity release is a term usually given to a very specific type of mortgage designed for people aged 55 and over, where you usually don’t make regular ongoing payments. Instead, any interest you owe builds up over time and, as previously mentioned, is only repaid, along with the initial amount of money you’ve released, when you die or go into long term care. Most providers expect the balance to be repaid within 12 months of the last homeowner’s death, or them entering a care home, although some require it to be paid back within six months.
Releasing equity from your home can be incredibly helpful in the right circumstances. For example, the funds released can be used to pay off debts with much higher interest rates, to cover the cost of essential care for you or a close relative; or to simply boost your retirement income if you don’t have other pension arrangements.
Who can access equity release?
Equity release schemes are usually only available to homeowners over the age of 55.
Your property must be in the UK and your main residence. If you’re not eligible for equity release, you may still be able to release equity from your home by simply taking out a bigger mortgage or remortgaging, but in this case you will need to keep maintaining regular mortgage payments once you have released the equity.
We have more information on eligibility criteria for equity release in our guide: Am I eligible for equity release?
Types of equity release
There are two main types of equity release scheme, lifetime mortgages, which are the most popular, and home reversion plans. They differ in their eligibility criteria and also in their pros and cons, but both enable you to access value from your home without having to leave it.
Here’s a simple explanation of lifetime mortgages and home reversion schemes. It’s worth remembering that taking out any form of equity release product is a very significant financial decision, and they are often highly complex products. It’s essential to seek independent financial advice to help you decide whether it is right for you and which type of plan might be best for you based on your own personal circumstances.
Lifetime Mortgage
Overview
A loan secured against your home but which you do not normally need to make any repayments on until you die or move into long-term care.
Who is it for
Typically available to people over 55.
Pros
You can access a lump sum or a small initial loan with the option to take more (“drawdown”) later.
Taking smaller loans as you need them will reduce the amount of overall interest you pay.
You can access up to 60% of the value of your home depending on your circumstances.
As long as you take out a product from an equity release provider which belongs to the Equity Release Council (the trade body for the equity release sector), it will come with a ‘no negative equity’ guarantee so that you or your family won’t have to pay back more than your house is worth when you move into long term care or die.
If your estate has enough value to pay off the mortgage when you die without selling your house then it can.
Cons
The longer you live, the higher the total interest owed will be, and therefore the lower your share of the remaining value of your house when it’s finally sold.
You can mitigate this somewhat with an interest payment plan, but then you still have to make regular ongoing payments.
If you choose a variable interest product bear in mind that over a long time this may go up significantly so you may want to look for a product with an interest rate cap or a fixed rate of interest.
Lenders will expect you to keep your home in good condition so you may need to set aside money to do this.
There may be early repayment fees.
Home Reversion
Overview
You sell all or part of your house but continue to live in it rent free until you die or move into long-term care.
Who is it for
Most companies require you to be over 65 to apply.
Pros
Allows you to access a lump sum or regular income or both.
You should be able to get between 30%-60% of the market value of your house (or part of your house) depending on your circumstances and needs.
As long as you take out a product from an equity release provider which belongs to the Equity Release Council (the trade body for the equity release sector), it will come with a ‘no negative equity’’ guarantee so that you or your family won’t have to pay back more than your house is worth when you move into long term care or die.
Cons
The home reversion company will own your home (or part of it) so you won’t be able to leave your property to any beneficiaries in your will.
Can often come with long term tax and financial planning implications.
You need to maintain your home in good condition so will need to budget for this.
As you will be living in your home rent free you will need to follow any conditions of the lease which might include paying fees like ground rent.
The schemes can be very complicated to unravel if you change your mind.
How much can you borrow and what might it cost?
You can get an idea of how much you might be able to access using our Lifetime Mortgage calculator. You won’t have to commit to anything at this stage and you should always seek regulated financial advice as your next step to help you decide if you should go ahead. It’s also worth making sure you are aware of all the fees and charges and how much it might cost to release equity:
How much does equity release cost
Both types of equity release schemes have arrangement fees and often other costs associated with them that can mount up. For example:
- A fee (or commission) to the financial advisor who recommends the right equity release product for you
- A valuation fee to determine the value of your property and how much equity you can release
- Arrangement fee and possibly also a completion fee
- Potential early repayment fees for a lifetime mortgage if you wanted to end the scheme
- Legal fees for a home reversion as you must make sure that you understand the terms of your lease to continue living in your home
- Buildings insurance for a Lifetime Mortgage
For more information, see Costs of equity release explained.
In addition, it’s important to budget for ongoing maintenance costs, as you will be responsible for keeping it in good repair in order to retain its value:
When you take out a lifetime mortgage you must pay interest on the amount you borrow. This can be paid off while you are still alive but most people opt to repay what they owe when their property is sold, either when they die or move into long-term care.
Due to a process known as compounding, the interest you owe rolls up over time and you start owing interest on previous interest owed, which can build up significantly over 10, 20 or even 30 years. When you take out a home reversion scheme you will only get 30-60% of the market value of your home (or the part of it you are selling) so you will be losing out on 40-70% of the value of your home that you could have left in your will or potentially have achieved if you were to downsize instead.
Do you pay tax on equity release?
Generally, no, you do not pay tax on money received from an equity release plan, even if it’s used to top up your income.
However, there could be some tax implications, depending on how you use the money received from equity release. For example, if you placed the lump sum from equity release into a savings account, you may need to pay tax on any interest received that breaches your personal savings allowance (PSA). This allowance enables you to earn £1,000 interest on your savings tax-free as a basic-rate taxpayer, or £500 as a higher-rate taxpayer. There is no personal savings allowance if you are an additional rate taxpayer. You can learn more about the PSA in our guide What is the Personal Savings Allowance?
How does equity release affect inheritance tax?
As equity release has an impact on the value of your estate, it may have an impact on whether your estate will need to pay inheritance tax. Furthermore, if you intend to use some of your equity release to provide cash gifts to family members, this might also be affected by inheritance tax. To find out more about the impact your equity release might have on what inheritance tax your estate will pay, have a look at our articles Understanding Inheritance Tax and Can I take out a mortgage to reduce inheritance tax?
Does equity release affect my benefits?
Many government benefits are means tested which mean they will take into account your income as well as your savings, including any money you might receive through equity release. This means that equity release might affect what benefits you are eligible for. You can read more about this in our article How lump sum payments and savings can affect your benefits.
However, if your benefits are non-means tested, such as Personal Independence Payment, Disability Living Allowance or Attendance Allowance, any money you get from equity release will not be factored into what you receive from the government.
Equity release pitfalls to be aware of
If you are running into funding shortfalls it can certainly feel attractive to release some of the value of your home, but you need to be fully aware of the advantages and disadvantages of equity release. These can be complex and there may be alternatives you should consider first before making any decisions. For something as complicated as Equity Release, the first step is almost always to find a regulated Financial Advisor who can help guide you through the complexities to offer advice on your own personal situation.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
Here are some of the main pitfalls you should be aware of:
- Equity release can be an expensive way to access cash compared to remortgaging or downsizing and rates are typically much higher than standard mortgage rates.
- Releasing equity from your home may significantly reduce the value of any inheritance you planned to leave, and may mean you won’t be able to rely on your property later in your retirement, for example, to pay for long term care.
- It can affect any current or future Government benefits you would receive as you’re turning money that was locked up in your home into capital or income. Lots of benefits are means-tested, so this might affect your entitlement to them. You can read more in our guide How lump sum payments can affect your benefits.
- Equity release schemes can be difficult, highly expensive, or even impossible to unravel if you change your mind.
- You’ll need to consider what would happen if you want to move house in the future. Some, but not all, schemes will allow this but there may be hefty charges involved so be sure to understand how this works.
- Equity release may not be suitable for you, or you may not be eligible if you still have dependents living with you as they may not have the right to continue living in the property if you die or move into care.
Read more in our guide: What are the risks of equity release?
Possible alternatives to equity release
If you need extra funds, equity release isn’t your only option. There are several alternative solutions which may help you achieve what you need. These include:
- An unsecured loan – if the amount you need is small and you can make regular payments this may be a good option.
- Remortgage – if you are still paying off a mortgage, you may be able to extend the term or borrow more. You may also be able to take out a retirement mortgage and only pay the interest on the mortgage. You can use our mortgage service to compare remortgage deals from the whole of the market and find out how much you might be able to save. You can find out more about the different mortgage options that may be available to you, and how they compare, in our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: what you need to know.
- Downsizing – if you need a large amount it may make sense to sell your property and move to a smaller house. Costs can still be high with estate agents fees and stamp duty but you’ll receive the market value for your property and have a clear view of where you stand. Learn more about downsizing in our article Five questions to ask yourself if you’re considering downsizing your home.
Find out more in our guide Six alternatives to equity release.
Getting advice on equity release
If you’re considering equity release, your first step should be to seek advice from a qualified financial advisor. You can find a local financial advisor on VouchedFor, the review website for financial advisors, or Unbiased, which connects users to advisors in their area, or for more information, check out our guides on How to find the right financial advisor for you.
They can help you understand the best option for you and recommend a suitable product from a member of the Equity Release Council (ERC). The council has a number of product standards which help safeguard borrowers so it is important that any provider you choose is a member. Advisors can also be members of the ERC. You can search for an equity release provider that belongs to the ERC here.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
Rest Less Money is on Instagram! Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.