If you own your own home and are looking for help with cashflow or living costs during your later years, then equity release might be an option for you.
Equity release is an opportunity to take money out against the value of your home – essentially, a new mortgage or financial agreement that gives you a lump sum or income.
You might need to use this money to cover the costs of long-term care. Or you might simply need it to live on.
In this guide, we break down the basics, examine the costs and potential benefits, as well as helping you work out how much cash you could access if you go this route.
As always, you should seek independent advice from a financial advisor. You might also want to talk to a solicitor about any specific legal ramifications.
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What is equity release?
Equity releases are agreements you can make with a bank or a buyer. The idea is to give you a chunk of cash against the value of your home while you get to remain living there.
These financial products vary and so do the terms (which we’ll go into more detail later). Equity release is usually only available to people who are nearing retirement age or older.
There are various ways of obtaining income from your home through equity release. You can take the money in a lump sum, as a regular income or as a combination of both.
How does equity release work?
Equity release schemes are financial products usually only available to people aged 55 to 60+ and older.
These schemes vary in how they work, but the idea is that the value of your home is used to give you either a lump sum or an income.
You either sell off a portion of your home but retain the right to live there. Or, you take out a mortgage for a percentage of your home for the remainder of your lifetime.
In the latter scenario, the interest on a home loan is accrued over time but repaid when the home is eventually sold, unless you decide to repay it earlier.
Equity release options
There are two different ways to release money tied up in your home via equity release.
These include lifetime mortgages and home reversion plans. Let’s take a look at the options in greater detail:
Lifetime mortgages
A lifetime mortgage is the most common form of equity release.
If you take one out, it means you borrow a percentage of your home’s value from the bank. It will be given to you as a lump sum or a series of lump sums.
Usually, your previous mortgage will be fully paid off.
With a lifetime mortgage, you will still be charged interest on the loan. But instead of having to pay it each month, it’ll be added on to the amount you have borrowed.
The whole amount will then be paid off when your home is sold.
This means that the amount you owe will increase every month.
For example, if you borrowed £200,000 against a home worth £250,000, you might be charged 3% interest, which equates to £500 a month.
You won’t pay this interest monthly, but when you come to sell the home 10 years later, you might end up paying back £200,000 plus £60,000.
If you stay in your home for many years after taking out a lifetime mortgage, you could end up owing more in extra interest than the home is worth. This is called negative equity.
Equity release schemes should come with “no negative equity” guarantees, so make sure you read the small print.
What are retirement interest-only mortgages?
Home reversion plan
A home reversion plan is where you sell off all or a chunk of your home to a company but continue to live there.
In exchange, the home reversion company will either give you a lump sum or an income.
You’ll usually only get 30% to 60% of the market value of your home, because the deal is you get to continue living in the home.
The market value percentage you get goes up the older you are.
This might sound good, but it can be extremely costly for you. You’ll only usually get a fraction of the value of the chunk you’re selling.
Then, when your home is eventually sold, the home reversion company will take the value of the percentage of your home they own in the sale.
For example, if your house was worth £200,000, and you sold half of it to a company, they might offer you £50,000, rather than the full £100,000 it is worth.
If the property value then later rose to £250,000 when you came to sell it, the home reversion company would still take a 50% stake in the property, so they would take £125,000.
What are the other types of equity release?
If you own a home outright or have a large chunk of equity in a home there are other options to release equity.
The simplest is usually to remortgage, especially if you’re able to show that you have a regular income.
If your home has gone up in value since you first bought it, chances are you’ll be able to borrow more against it.
As always, consider your options, the monthly costs and what you might be up to in terms of work in the coming years.
It can be harder to get a traditional mortgage over the age of 50. Consult with high street mortgage lenders but talk to an independent mortgage broker, too.
Another option that might be available to you if you’re happy to move home, would be to sell up and move to a cheaper area or smaller home. This can free up equity. Find out more about downsizing in this guide.
Another option might be a Retirement Interest-Only Mortgage (RIOM). This is a loan taken out against the value of your home, which you only repay the interest on in monthly instalments.
The interest rates on a RIOM are typically lower than a lifetime mortgage. You might also be able to borrow a higher sum. Find out more in this guide to RIOM.
Is equity release safe?
Equity release products are heavily regulated to protect the individuals who benefit from them.
All plans approved by the Equity Release Council must offer “no negative equity guarantee.” This means that you'll never owe more than the value of your property when it's sold.
So if the value of your house went down while you lived there - to the point where it no longer covered the amount you owe, the remainder of the loan would be written off.
David Forsdyke of Knight Frank Finance says: “Equity Release is still widely misunderstood, but that is improving slowly. Most of the misconceptions come from consumers not understanding how much the products have evolved and improved in recent years.
“It has, in my opinion, become one of the safest products in modern financial services, thanks to specific advice rules from the Financial Conduct Authority to ensure it is only sold when appropriate.
“The standards framework from the Equity Release Council adds another layer of protection for consumers. Plus, all advisers must hold an Equity Release qualification and all sales must be advised, which means consumers can’t buy direct and ‘get it wrong’.”
Sarah Coles, Personal Finance Analyst at Hargreaves-Lansdown, agrees. “Equity release schemes have a chequered past and still struggle with their reputation,” she says.
“However modern schemes which follow the guidelines of the Equity Release Council have considerable protections, including ‘no negative equity’ guarantees.”
How to check if your equity release provider is legitimate
There are lots of different firms offering different things. The best way to make sure a firm is compliant with current UK rules is to check the Financial Conduct Authority.
You should also make sure that the lender or buyer is a member of the Equity Release Council.
Another thing to look out for is an “adviser” with an Equity Release qualification. You should always have the opportunity to chat things through with an adviser before taking out a product.
Is equity release a good idea?
As with anything, there are pros and cons to equity release.
Under the right circumstances, it can be a much-needed means of raising cash. It is, however, far from the only option available.
Selling up and downsizing would be an alternative, for example.
It’s worth considering both sides:
Pros | Cons |
|---|---|
You get to stay in your home. | The interest added to a lifetime mortgage can have a big effect on the sum you owe to the equity release company. |
You get to enjoy the money that has been sitting in your home. Better still, you don’t need to pay tax on it. | The money you release could mean you’re no longer entitled to means-tested state benefits like pension credit and council tax benefit. |
You can decide to downsize and sell up later. | Equity release schemes can be complicated to unravel, however. There is also a risk that you won’t own enough equity in your home to buy somewhere else. |
There is some built-in flexibility and you can get out of an equity release agreement in the form of a lifetime mortgage. | You are likely to have to pay a penalty to repay the loan in full and roll up the agreement early. |
There is no fixed term or date by which you’re expected to repay the value of your loan. | Equity release can be more expensive compared with a traditional mortgage. |
You can typically get cash out more quickly than if you were to sell up and downsize. | Home reversion plans won’t offer you the true market value of your home. |
Equity release schemes are available to people over 55 so you might be able to release a lump sum years or even decades before you start thinking about retirement. | You have to pay arrangement fees on equity release schemes, which could be between £1500 and £3000, or even more. |
Reputable schemes offer “no negative equity guarantees”. This means that after moving fees (estate agents and solicitors’ costs), if the value of your home is not enough to cover the original loan, neither you or the people inheriting your estate will be liable to pay the difference. This rule is standard for any schemes approved by the Equity Release Council. | After interest is added, there might well be little or nothing left on the value of your home when it is eventually sold. If you can make interest repayments in advance and regularly, it will reduce the amount of interest payable when the home is eventually sold. This will safeguard some of the value of your asset. |
You can choose a scheme that gives you the right to move home. Different providers have different policies and they are subject to approval. | The new home you want to move to might not fit with your provider’s criteria and it might be turned down. |
When you pass away and your inheritance tax bill is calculated, the equity release mortgage and interest is subtracted from the value of your home. This means people who benefit from your estate after you die could well pay less or no inheritance tax. | There might be no remaining equity left in your home to leave your loved-ones after you die. |
Should I release equity from my home?
This is a question only you can answer. There are positives and drawbacks (as explained above).
It makes sense to take independent financial advice before making any decisions. You might also want to talk to loved ones and friends about your options.
Another idea would be to talk to your local estate agent. They’ll be able to give you a current valuation and talk to you about the market in your area.
If homes are selling quickly where you live, this might help inform your decision, as downsizing might be a better option.
Remember, equity release isn’t the most affordable choice to release cash.
Being able to stay in your home may seem like a real bonus to begin with, but this might feel like a far less attractive option later.
How much equity can I release from my home?
The amount of equity you can release from your home depends on a number of factors.
The first thing is to get an up to date valuation from an estate agent or mortgage lender.
You can decide the percentage of the value of the home you want to sell via a reversion plan or take out a lifetime mortgage against.
The maximum percentage of the value you can take out depends on criteria set by a lender.
This might depend on your age and the overall value of your home, for example.
It makes sense to do plenty of homework and take independent advice before working out if the sum you can extract makes sense.
Equity release: frequently asked questions
Is it safe to do equity release on my home?
It depends what you mean by safe. Equity release schemes like lifetime mortgages and home reversion are legitimate.
But that doesn’t mean they’re necessarily the right option for you. They offer the option of staying in your home, but they could prove overly expensive in the long term.
What is the catch with equity release?
There are pros and cons with equity release. These obviously vary but you might say that the biggest “catch” is that you won’t usually get market value for your home. And you could end up being charged a high rate of interest.
What is the interest rate on equity release?
The rate of interest you can expect to pay on a lifetime mortgage is likely to be higher than a traditional mortgage. According to the Equity Release Council, the average interest rate on a lifetime mortgage was just over 6% in late 2023.
A lifetime mortgage rate can be fixed. If it’s variable, then there will be an upper cap.
What is the maximum equity I can release?
The answer depends on your situation as the amount available is linked to your age, the value of your home and the percentage you are mortgaging or selling off.
What is the downside of equity release?
Check out our detailed list of pros and cons (above). Broadly speaking, there are more cost effective ways of taking equity out of your home, but usually these involve selling up.