Remortgaging

What is equity release and how does it work?

5 min read

Equity release is a way of freeing up cash from your home, without having to sell or move from the home you love. Read the article below to learn more about your equity release options and how equity release works below.

  • Abigail Bolton Senior Digital Website and Content Marketing Executive
    Abigail Bolton

    Senior Digital Marketing Executive

    Published February 7th 2024

middle aged homeowner who has just completed equity release to access a cash lump sum

How does equity release work?

Equity release works by freeing up cash that is tied up in your home, giving you access to a cash, either as a lump sum or regular payments. There are a couple of different types of equity release options which work in different ways, however for both, repayments are usually made when the final borrower dies or moves into long-term care.

Find out how long equity release takes.

What are the different types of equity release?

There are two main types of equity release options or products you can choose from, a lifetime mortgage, or a home reversion plan:

Lifetime mortgage:

A lifetime mortgage is the most common equity release option, and similar to a standard mortgage, it is simply a loan secured against your home. You can usually choose to make repayments in instalments or repay the mortgage and interest when you die or move permanently move into residential care. Repayment options vary lender to lender, so be sure to check out the terms set out by each lifetime mortgage provider.

Home reversion plan:

A home reversion plan allows you to sell all, or part, of your home to a reversion company. In return they will pay you either a cash lump sum or regular payments, and you will be able continue to continue living in your home until you die, or permanently move into residential care. The reversion company doesn’t usually pay market value though, and so the value of your estate may be significantly reduced.

Who can get equity release?

There are certain criteria that dictate whether you are eligible for equity release:

  • Your age: To be able to apply for a lifetime mortgage you (and your partner if borrowing together) must be at least 55 years old and at least 60 years old for a home reversion plan.

  • Your home: You must own property in the UK, it must be your main residence and it must be worth a minimum of £70,000.

  • Your mortgage: It’s easier to secure an equity release if you have little or no mortgage left on your property. However, if you still have a mortgage, or other loan, secured against your home you may still be able to equity release. It will just depend on the value of your home and the amount you owe. You may also have to pay off any outstanding mortgages or loans at the same time as taking equity release.

  • Your dependants: If you have anyone living with you, now or in the future, they’ll likely have to sign a waiver releasing any rights to the property.

How much does equity release cost?

Setting up a lifetime mortgage has more upfront costs than a home reversion plan, as like with a standard mortgage, you’ll have conveyancing and arrangement fees, as well as survey and valuation costs. Long term costs for both differ: with a lifetime mortgage, if the interest is added to the loan, the amount repayable increases over time; and with a home reversion plan, it’s unlikely you’ll benefit from an increase in property value over time.

What are the advantages and disadvantages of equity release?

Equity release can be fairly complicated, so it’s crucial you have a good understanding of the risks and rewards before you decide to move ahead. We outline some advantages and disadvantages of both equity release types below. However, it’s always important to seek independent advice from an equity release adviser, so they can review your personal circumstances to advise if equity release is a good idea for you.

Advantages:

  • The money you receive is tax-free money

  • You will get either a cash lump sum or regular payments to help supplement your income

  • You can continue to live in your home

  • You might reduce the amount of inheritance tax for your family to pay

Disadvantages:

  • Your entitlement to means-tested benefits may be affected

  • It can be complicated to reverse if you change your mind

  • It can be expensive: the interest on a lifetime mortgage is usually higher than a standard mortgage and the money paid for your home via a home reversion plan can be substantially less than market value

  • Any inheritance you’re able to pass down will be affected, therefore it’s important to talk through your plans with family members to avoid conflict further down the line

Is releasing equity a good idea?

Equity release can be a good idea if you need access to a cash lump sum or money to help supplement your income in retirement. However, long-term, it’s typically an expensive way to access your cash and there could be some alternatives to look into, such as downsizing. Make sure you speak to an equity release adviser so you can discuss all your options.

Find out more about downsizing in retirement.

Equity release frequently asked questions:

What is the interest rate on equity release?

Equity release interest rates vary by lender as there is no set interest rate on equity release products Like standard mortgages though, the Bank of England base rate affects the equity release interest rates, which is currently at a high, and so the interest rates for lifetime mortgages are also high. The way you pay the interest will also be different by each lender, however most providers keep the interest rate locked in from when you sign up.

How can I use the money I get from equity release?

You can use the money in any way you want, for example, you could use the equity to pay for a once in a lifetime holiday, home improvements, in-home care or care home fees, help out family members or to supplement income.

Does equity release affect your benefits?

Taking out a lump sum could affect your eligibility for means-tested benefits, including Pension Credit, Savings Credit and Council Tax Reduction. The benefits you would’ve been eligible to receive could be reduced or lost, therefore it’s important to seek independent advice from an equity release adviser before doing anything.

Does equity release affect inheritance for your family?

The two types of equity release (lifetime mortgage and home reversion plan) work in different ways, however both still allow you to ring fence some of the value of your property as an inheritance for your family. If you are thinking about doing this, bear in mind your family may have to pay tax on the value they inherit from you, here we look into what is inheritance tax.

Is equity release the same as remortgaging to release equity?

Although both equity release and remortgaging to release equity allow you to access cash that is tied up in your home, the two are quite different. Equity release refers to products designed for those who are 55 and over and want access to their money to use in their retirement. Remortgaging to release equity is when you increase the amount borrowed on your property and replace your existing mortgage with a larger one. You get access to a cash lump sum, which you can use for whatever you require, and you continue to make monthly repayments. There is no criteria to remortgage to release equity, it just has to be approved by your lender. Find out more in our remortgaging to release equity article.

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