Equity release – what is it and how does it work?

Equity release is a way of unlocking some of the wealth tied up in your property without having to sell your home.

It has proved hugely popular in recent years with more than half of financial advisors predicting that the equity release market will exceed £5 billion in 2020 alone, according to research by insurer Canada Life.

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.

This guide explains how equity release works to help you decide whether it could be an option worth considering.

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 and your property is sold.

Releasing equity from your home in this way, can in the right circumstances be incredibly helpful. 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.

Whatever your reasons for considering equity release, it’s important to remember that you are effectively taking money out of your home. While you can continue to live in it, you will still have obligations to others and you’ll need to check the small print to ensure that you are comfortable with the rights that any equity release firm will have over your property.

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.

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 table to enable you to quickly compare lifetime mortgage 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 therefore always worth seeking 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.

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 a free online 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: 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
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: Equity release schemes can be quite expensive ways of accessing money. 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 (which Einstein famously declared the 8th wonder of the world), 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 70-40% of the value of your home that you could have left in your will or potentially have achieved if you were to downsize instead.

Equity release pitfalls to be aware of

Growing numbers of homeowners are releasing equity from their homes with over 20,000 people releasing an average of £76,064 in the first half of 2019 alone (UK Equity Release Market Monitor Half Year 2019). 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. 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.
  • 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.

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. 
  • 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.

Getting advice on equity release

If you’re considering equity release, your first step should be to seek advice from a qualified financial advisor. 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
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