Equity release is often used as a way to boost retirement income, cover rising living costs, help family, or pay off debts, but it should never be entered into lightly.
Unlocking some of your property wealth is a serious decision, so it’s essential to fully understand the impact it could have on both your finances and your family relationships.
Here are some key questions to ask yourself if you’re considering equity release.
- Do I meet the eligibility requirements for equity release?
- What type of equity release plan is right for me?
- Should I tell my family I’m considering equity release?
- How does equity release affect my benefits?
- Will I want to downsize in future?
- Have I factored in all the costs of equity release?
- What impact will releasing equity from my home have on my tax bills?
- Does the equity release provider I’m considering using belong to the Equity Release Council?
Do I meet the eligibility requirements for equity release?
If you’re aged 55 or over and a homeowner, you’ll usually qualify for equity release. If you’re releasing equity with your partner, they must also be aged 55 or over.
Most equity release providers will require your property to be a minimum value, usually around £70,000 or £80,000. If your home is considered ‘non-standard’, for example it’s timber-framed or of concrete construction, some providers may be unwilling to accept your application.
The property you want to release equity from must be your main residence and not a property which you let out. If you still have a mortgage on your home you can still apply for equity release – some people decide to use the proceeds of equity release to pay off what they owe.
See more in Am I eligible for equity release?
What type of equity release plan is right for me?
You’ll need to seek professional financial advice before releasing equity from your home, but before you do it can be helpful to get to grips with how the two main types of plan work. These are lifetime mortgages and home reversion plans.
Lifetime mortgages are the most popular type of equity release plan and usually enable homeowners to draw down money as and when they need it, helping to keep interest charges down. Some plans also allow you to pay back some of the interest you owe, which can also reduce costs significantly over time. With this type of plan, you remain the owner of your home. Find out more about how lifetime mortgages work in our guide Lifetime mortgages explained.
Home reversion plans, however, involve the equity release provider paying you a lump sum for a portion of your property. You can stay in your property rent-free for the remainder of your life. When the property is sold, the proceeds are split between you and the equity release provider, according to the proportion you each own.
The right plan for you will depend on your individual circumstances, and whether you’re keen to retain ownership of your property, or if you’re happy to sell part of it. Learn more about home reversion plans in our article Home reversion – what is it and how does it work?
Should I tell my family I’m considering equity release?
Releasing equity from your home will reduce the value of any inheritance you might have planned to leave your loved ones. It’s really important to inform them of your plans, and the implications of unlocking some of your property wealth, so they’re aware of the impact it may have on them. Some people use some of the equity they’ve released to provide their children or dependents with a ‘living inheritance’ if for example, they want to help them cover education costs, or put down a deposit on a property of their own.
Some equity release plans allow you to ring-fence some of your property wealth so that you will be able to pass on a guaranteed amount to them when you die, known as an inheritance guarantee, so it’s worth considering this option if this is important to you.
How does equity release affect my benefits?
If you receive means-tested benefits, where the amount you get is based on your income and savings, equity release may reduce your entitlement, or even stop it altogether. For example – Pension Credit, Universal Credit and Council Tax Reduction are some of the means-tested benefits that might be affected by equity release.
To see an example of how this might work – if you are currently claiming the Guarantee Credit element of Pension Credit, which in the 2023/24 tax year tops up your State Pension to a guaranteed weekly amount of £201.05 if you’re single, or £306.85 if you’re in a couple. If you have capital of less than £10,000, you can claim the full amount of the Guarantee Credit, but for every £500 of capital you have in excess of this amount, you lose £1 a week of your Guarantee Credit. If, therefore, you decided to release £20,000 of equity from your home and had no existing savings, the money released from your house would count as capital for your benefits calculation. This means with £20,000 in capital, you’d lose £20 a week of your Guarantee Credit (£10,000 divided by £500). You can find out more about how Pension Credit works in our article Pension Credit explained and how equity release might impact benefits in our article How lump sum payments and savings can affect your benefits.
Releasing equity from your home could also affect any Council Tax Reduction or Universal Credit entitlement as you’ll usually only qualify if you have savings or capital of less than £16,000. If you are still working then local councils can set their own savings limits, but this will usually be £16,000 or less.
Will I want to downsize in future?
One of the main reasons people opt for equity release is that they want to stay put in their current home. However, it’s important to consider that your plans might change over time, and that you may decide you want to downsize in future. If you have released equity from your property and then move, you’re likely to face charges if you want to use the proceeds of your sale to pay back what you owe.
If you think downsizing could be a possibility, some providers offer what’s known as ‘downsizing protection’. This means that if you do decide to downsize, you can repay your equity-release plan in full – either because you want to pay off what you owe, or because it can’t be transferred to your new home – without being hit by any early repayment charges. Downsizing protection can usually only be used five years after you’ve released equity from your home. If you’re thinking about downsizing, our article Five questions to ask yourself if you’re considering downsizing your home may help.
Have I factored in all the costs of equity release?
Interest rates on equity release products tend to be higher than for standard mortgages, so it’s vital to understand how much unlocking some of your property wealth might cost you over the long run. Sometimes this can come as a shock, as because you’re not repaying any of the interest on the money you’ve borrowed, interest rolls up and is compounded. This means that you’re essentially charged interest both on the original sum unlocked and also on any interest already charged. It’s therefore vital to check that you’ve gone for the most competitive equity release rate possible, as even a seemingly small difference in interest rate can make quite a substantial difference in the amount charged over twenty years.
Our Lifetime Mortgage Calculator can give you a quick indication of the costs that might be involved. You can also compare the costs of a lifetime mortgage where you are making monthly interest repayments vs instead choosing to roll up the interest without making any monthly repayments.
See more in our article: How much does equity release cost?
See how much wealth you could unlock from your home with this free, easy to use calculator. Fill in a few details to get an estimate – and if you’d like some advice, arrange to speak to an expert.
What impact will releasing equity from my home have on my tax bills?
Any money you receive from equity release is tax-free – however if you were to put it into a savings account, any interest earned will be subject to standard income tax rules.
Releasing equity from your property will also reduce the value of your property that could be eligible for inheritance tax, which could in turn help reduce any potential Inheritance Tax liability. This is a complex area of financial planning so if you’re considering releasing equity specifically for this reason, it’s essential that you seek professional financial advice first as equity release may well not be suitable for you. You can find out more about how Inheritance Tax works in our guide to Understanding Inheritance Tax.
Does the equity release provider I’m considering using belong to the Equity Release Council?
The Equity Release Council is the trade body for the equity release sector. Its aim is to promote “high standards of conduct and practice in the provision of and advice on equity release which have consumer safeguards at its heart.”
For example, products provided by members of the Equity Release Council must provide you with the right to remain in your property for life or until you need to move into long-term care. They must also offer a “no negative equity guarantee” which means that if house prices fall and your property ends up being worth less than your outstanding loan, you won’t have to pay any more.
You can find an equity release adviser via the Equity Release Council’s (the trade body for the equity release sector) website here.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Alternatively, you can find out more about equity release in our guide Equity release: What is it and how does it work?