What is equity release?


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Should you use equity release?

Equity release means withdrawing money from the value of your home, either as a lump sum or as a new monthly income.

  • You get to stay in your home but use the value of the equity you own in it to generate a new source of income.

  • You can boost your retirement funds if your pension is too small or you want a lump sum to spend as you wish.

If you are asset-rich but cash-poor, it lets you convert your highest-value asset - your home - into a new source of regular income.

Equity release schemes can be complicated and usually come with many hidden costs and risks, so talk to an expert to find out if they are right for you.

You can check how much equity you have in your home using our simple online calculator

How does equity release work?

When you release equity in your home you take part in an equity release scheme. There are several different schemes available so you should get professional financial advice before deciding which one is right for you.

With most equity release schemes you borrow money against the value of your home, and the money is repaid when your house is sold.

They work on the principle that you will be lent part of your home's value, but the lender gets a share of the proceeds when your home is sold.

How much can you borrow?

How much money you get is based on your life expectancy. The closer you are to your life expectancy the more you can get because the equity release company will be repaid sooner.

Therefore, depending on your age and circumstances you can usually release a lump sum of between 20% and 60% of the value of your home.

What equity release schemes are available?

There are 2 main equity release schemes:

Lifetime mortgages

These work by securing a loan on your property. You do not have to make monthly repayments because the loan and any interest is repaid when your home is sold.

Equity release is not available to people aged under 55, and most schemes are only available to those aged 60 and over.

Most lifetime mortgages charge a fixed rate of interest, which means your interest rate will never go up.

However, interest can quickly add up and reduce the amount paid out to your family when the house is sold.

Home reversion schemes

You sell all or part of your home to a home reversion company for a lump sum or a regular income, but you can still live there for the rest of your life.

The home reversion company can only sell their share of your property when you die, or if you move into long term care.

You may get a bigger pay-out if you are older, for example over 70, a smoker or suffering from a serious illness as you are likely to have a shorter life expectancy.

With a home revision scheme you know exactly how much you are releasing, so the equity you can leave in your will does not change. The amount you release with a lifetime mortgage increases over time, meaning you will have less equity the longer you live.

No negative equity guarantee

Equity release products should have a 'no negative equity guarantee', which means you will never be asked to pay back more than the sale value of your property.

Is equity release right for you?

To be eligible for equity release you must:

  • Be over 55 years old

  • Have no outstanding mortgage to pay

  • Own a property in good condition

Therefore it suits older people, usually retired, and in need extra money to supplement their pension or other income.

Benefits of equity release

Benefits of equity release include:

  • Getting a lump sum or a new monthly income

  • The money that is released is usually tax free

  • No negative equity guarantee

  • Reducing the size of your estate could reduce the impact of inheritance tax

Risks of equity release

  • High cost could leave little money left for your family when you die

  • You may lose means tested benefits like pension credit

  • It can make it difficult to move home

  • You cannot repay the loan early without facing early repayment charges

You will probably need to pay valuation and legal fees, and be charged for a survey of your property. You will also still be responsible for maintaining and repairing your home, and will still have to pay Council Tax.

What are the alternatives?

Equity release will not suit everyone, and there may be other ways of generating extra income using your existing assets.

Downsize your home

You could downsize to a smaller home if your family have moved out, you are happy to move to a cheaper area, or you simply do not need as much space any more.

The amount you could make is the difference between what you sell your home for and how much the new one costs. Here is how you can get your home valued for free.

However, it is easy to underestimate the cost of moving house. As well as paying for the move itself, there are other costs like estate agent fees, solicitor fees and stamp duty you need to budget for.

Here is a step by step guide to selling your home

Get a secured loan

A secured loan, sometimes called a homeowner or home equity loan, lets you use the equity in your home as collateral. Here is how secured loans work.

You can usually borrow more over a longer period than with an unsecured loan, but your home is at risk if you do not keep up your repayments. Most secured loans are only available through a broker.

What else should you consider?

If you do decide to go ahead with equity release, look for schemes that are approved by the Equity Release Council (ERC).

This means you will be given several guarantees:

  • The right to live in your property for life

  • The freedom to move to another property without penalties

  • You will never owe more than the value of your home

If you are unsure about an equity release company, you can check they are regulated by the FCA (Financial Conduct Authority) by checking their register.

Get professional advice

There are many different equity release plans on the market and a variety of risks involved, so it is worth speaking to a professional first.

An Independent Financial Advisor (IFA) or equity release broker will be able to look at your overall finances and help you decide if it is the best course of action for you.

To understand the features and risks, ask for a personalised illustration from a lifetime mortgage company. Check that this type of mortgage will meet your needs if you want to move or sell your home or you want your family to inherit it. If you are in any doubt, seek independent advice. Remember, your home may be repossessed if you do not keep up repayments on your mortgage
