How does equity release work?

Equity release is a way to tap into some of the value of your home without having to move out. It can be beneficial for older homeowners in the UK, but it isn’t without risk, and there may be better alternatives. On this page, we’ll explain how equity release works, the different types and eligibility criteria, and some factors to keep in mind when deciding if it’s right for you.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

Equity release can be defined as a way for homeowners to access some of the money tied up in their property without having to sell or move out. In other words, it’s a financial product that lets you convert some of your home’s value into cash while continuing to live there.

This is usually done through a special type of equity release mortgage. Unlike a standard loan, however, the homeowner doesn’t necessarily have to make monthly repayments. Instead, the loan is repaid when they sell the home and move into long-term residential care or pass away.

To explain equity release on a property, it is helpful to understand what equity is. Anyone with a mortgage will have equity, which is the difference between the value of your home and what you still owe, i.e. your remaining mortgage balance. Say your home is worth £300,000 and you have £50,000 left to pay on your mortgage, your equity will be £250,000. For most equity release plans, you will have to pay off your mortgage before accessing the equity.

There are two main types of equity release:

1. Lifetime equity release mortgage
2. Home reversion plan

Depending on which option you choose, you can access the money as a lump sum, in smaller ongoing amounts, or a mix of both.

This is the most common type of equity release scheme. You take out a mortgage loan against your property, and you can then either take a lump sum or withdraw smaller, ongoing amounts as needed, known as drawdown. With drawdown, you only pay interest on the money you take out, not on the total equity release loan amount.

While you don’t have to make repayments on equity release mortgages during your lifetime, some plans let you make voluntary repayments on the original amount you borrowed, or just the interest, with the advantage that you can reduce your overall costs.

So how does equity release work with a lifetime mortgage? When the final person on the loan agreement dies or moves into care, the home will be sold to repay the loan. Any leftover money goes to the beneficiaries. An important feature of this type of equity release plan is the no-negative-equity guarantee, which means your beneficiaries won’t owe more than the home’s value, even if the loan amount exceeds what the property sells for.

A home reversion plan is a type of equity release scheme that allows you to sell all or part of your home to a provider, such as a financial institution or a specialised equity release company. While you may receive less than the market value for your home, you gain access to money and can continue living in your property rent-free for the rest of your life.

You can typically sell between 25% and 100% of your home, with the amount depending on your age; older homeowners may be able to sell a larger share since providers expect to wait less time before selling the property.

With home reversion plans, you’re free to choose whether to make any repayments during your lifetime. Instead of paying interest like a traditional loan, the money you receive is repaid when your home is sold, either after your death or if you move into long-term care.

To be eligible for equity release schemes, you typically have to meet these requirements:

• For a lifetime mortgage, the youngest homeowner must be at least 55. For a home reversion plan, both applicants must be 60 or older.
• You must own a property in the UK as your main residence. It should be in good condition and have a minimum value of £70,000.
• You may need to demonstrate a strong financial situation and good credit.
• With a lifetime equity release mortgage, you can keep your existing mortgage and use the equity release to pay it off before accessing the remaining equity. For a home reversion plan, you generally need to have paid off your mortgage before applying.

Most equity release loans charge interest, which is usually calculated daily and added to your loan monthly. If you don’t make payments on a lifetime mortgage, for example, the interest compounds, meaning you’ll pay interest on both the original loan and the growing interest.

The amount you owe will ultimately depend on your equity release mortgage type, lender, and whether you pay interest as you go or let it build up. Interest rates are tied to the Bank of England’s rates, so higher rates make lifetime mortgages more expensive. If you take extra funds with a drawdown mortgage, the new amount will be charged interest at the current rate (which may be higher or lower than your original rate). With a lump sum lifetime mortgage, interest starts building immediately on the full amount. You can read more about what’s next for interest rates in the UK.

Some equity release schemes, including home reversion schemes, don’t charge interest. Instead, the lender takes a share of your home’s value.

The amount of equity you can release ranges from 20% to 60% of your home’s value. Generally speaking, the older you are, the more you can release. Other factors include the property value and house type.

With equity release mortgages, the minimum lump sum you can take is typically £10,000. Online calculators can give an estimate of how much you might be able to unlock from your property, but a financial adviser can provide clearer guidance.

You don’t have to have a specific reason for releasing equity from your home.

Some common reasons include:

• Pay off debts
• Fund home improvements
• Boost retirement income and supplement pension funds
• Buy a second home
• To cover the costs of care
• Support family members with gifts, holidays, or other major expenses

A word of caution about debt repayment: Using equity release to pay off debt may not always be advisable, as it can lead to a cycle of increasing debt. It can be worth speaking with a financial adviser or debt relief organisation for guidance and alternatives.

If a home has an equity release plan, it’s usually sold to repay the loan and interest. Any remaining funds go to the beneficiaries. However, if they have the money, they can pay off the equity release loan without selling the property.

For lifetime equity release mortgages approved by the Equity Release Council, a no-negative-equity guarantee ensures that neither you nor your beneficiaries will owe more than what the property sells for. To make it easier after they’re gone, homeowners can make optional repayments of up to 10% of the loan per year to reduce the balance.

With home reversion plans, the lender recoups their share when the house is sold, either after the homeowner passes away or moves into long-term care.

You can only release equity with the help of a qualified equity release adviser. If you opt for an equity release firm, they would need to provide a guarantee that you can stay in your house for life and also offer a no-negative equity guarantee. You can find firms through the Equity Release Council directory.

You can consult a financial adviser to help you find the right equity release mortgage or plan for you, and they should ideally be registered with the Financial Conduct Authority. Your adviser will provide a personal recommendation that includes an equity release scheme, costs, interest rates, and any potential repayments.

The pros and cons depend on the type of equity release mortgage or plan you choose, but here are some key considerations:

• You can get a tax-free lump sum or regular payments to boost your income.
• With a lifetime mortgage, you can ring-fence part of your home’s value for inheritance.
• It reduces the value of your estate, which can bring inheritance tax benefits.
• You can use the money exactly how you want, whether for a more comfortable retirement or gifting money to your family.
• You get to stay in your own home.

• Taking out an equity release mortgage may affect your eligibility for means-tested benefits.
• Interest rates on lifetime mortgages are typically higher than standard mortgages, averaging 6.31% APR in September 2024*.
• Fees for advice, legal work, and valuations can add up, sometimes reaching £3,000.
• The loan and interest reduce what you can leave to your loved ones.
• Releasing equity now could limit funds available for later-life care.

Equity release is not a decision to be taken lightly. Your age, health, and financial plans are all key considerations. If you potentially want to move or downsize later, it may not be the best option. Specialist financial advisers can help you compare your options.

If you’re looking for ways to strengthen your finances and income for the future, you might want to read more about how to budget your money.

Equity release is not for everyone. Before opting for an equity release mortgage, you might look into some of the following alternatives:

• Downsize your home. Moving to a smaller, cheaper property can free up money.
• Access savings or investments. Cashing in savings or selling investments can provide cash without releasing equity. Making sure you’re getting an optimal interest rate on your savings by comparing high-yield savings accounts can be a simple yet effective step to grow your money.
• Retirement interest-only mortgage. This is similar to equity release, but you only pay the interest each month, keeping the original loan amount the same until you sell the house or pass away.
• Remortgage. This can lower your monthly payments and help you access some equity.
• Rent out a room. If you have extra space, renting it out can give you a cash boost. You can find some more ideas in our article on how to save money.
• Local grants. Check for any assistance from local authorities. Find out more about financial help for elderly parents.
• State benefits. Make sure you’re claiming all the benefits you qualify for.

For those under 55, it can help to talk to a financial adviser or mortgage broker for advice on your particular situation.

Having seen how equity release works, you might start thinking about getting more from your money. At Raisin UK, you can find a wide range of high-interest savings accounts. Plus, the savings accounts in our marketplace are covered by the Financial Services Compensation Scheme, giving you peace of mind that your money’s safe and secure.

To quickly and easily open a savings account with one of our partner banks or building societies, simply register for a free Raisin UK Account and apply for your chosen account today.

*https://www.ftadviser.com/equity-release/2025/1/13/green-shoots-of-recovery-in-equity-release-market/