8 questions to ask yourself if you are considering equity release

Equity release allows eligible homeowners to access some of the wealth tied up in their property without immediately having to move out. 

While this may sound appealing, interest can build up over time. Taking out a lifetime mortgage is a major, long-term financial commitment. The loan and interest can affect your future finances, the inheritance you leave and your ability to move home.

If you are considering equity release, here are eight important questions to ask yourself before taking the next step.

Equity release checklist at a glance

Before taking out equity release, make sure you understand:

• Why you need the money and how much you actually require.

• How the loan and interest could grow over time.

• How your inheritance could be affected.

• Whether your benefits, tax position or future care funding could change.

• Whether you might want or need to move home in the future.

• Which alternatives you have considered.

• What happens if your circumstances change later.

• Whether you meet the lender’s eligibility criteria.

These points provide a useful starting point, but each deserves a closer look. Regulated financial advice and independent legal advice are also required before taking out a lifetime mortgage.

1. What do I need the money for? 

Start by thinking about why you want to release money from your home and what you want to use it for.

People choose equity release for many reasons, including:

• Increasing their retirement income

• Repaying debts

• Paying for home improvements or modifications

• Helping family members financially

• Paying for care or medical treatment

Consider whether the expense is essential or optional, and whether it is a one-off cost or something you will need to fund over a longer period.

This can also help you decide how much to release. A lump sum gives you the money upfront, while drawdown lets you take an initial amount and access more later. Because interest is generally charged only on funds you have released, drawdown can help slow the growth of the debt.

Be cautious about using equity release to repay short-term debts, as you could replace them with long-term borrowing secured against your home.

Before proceeding, consider whether future pension income, an expected inheritance, a property sale or another financial change could meet the need instead.

If you are releasing money to give to family, consider the effect on your own estate and whether you will still have enough financial flexibility for unexpected costs in later life.

Writing down the amount you need and separating essential from desirable spending can help you make a more informed decision.

2. Am I willing to move?

This is a big question, especially if you’ve lived in your home for a long time. Ask yourself whether you want to remain in your current home permanently or whether moving or downsizing could become an option.

Think beyond your current situation too. Would your home remain suitable, or could it be adapted, if your mobility changed? Is it close enough to family, healthcare, shops and other support you may need later?

Selling a larger property and buying a smaller home could release money without taking out equity release. It could also reduce heating bills, maintenance costs and some of the practical challenges associated with looking after a larger property.

However, moving has costs of its own. Estate agent fees, legal fees, removals and the cost of purchasing another property all need to be considered. There may also be an emotional cost if moving means leaving a long-term family home or moving further from friends and relatives.

Many lifetime mortgages can be transferred, or “ported”, to another property. However, the new home must meet the lender’s criteria. If the lender will not accept it as suitable security, you may have to repay some or all of your lifetime mortgage.

Early repayment charges may apply, although some plans include downsizing protection.

3. Is leaving an inheritance important to me?

Whether you want to leave an inheritance is a personal decision, but it is important to understand how equity release could affect your estate.

With an equity release lifetime mortgage, you continue to own your home. However, any outstanding loan and compound interest usually have to be repaid when the last borrower dies or moves permanently into long-term care.

If you do not make interest payments, the interest is normally added to the loan. Interest is then charged on both the original borrowing and interest already added, so the balance can increase substantially over a long period. 

This can reduce the value of your estate. However, the amount your beneficiaries eventually inherit also depends on future property values and how long the mortgage remains in place.

There are ways to reduce the impact. Making voluntary repayments can limit the amount of interest added, while using a drawdown facility means interest is normally charged only on the money you have taken.

Some lifetime mortgages also offer inheritance protection. This allows you to ringfence a proportion of your property's future value for your estate, although choosing this feature may reduce the amount you can borrow.

Equity release can also be used to provide a living inheritance, but this should be considered carefully because it reduces the value of your estate and could affect your own future financial security.

It is also important to consider the needs of a surviving partner, other dependants and your possible future care costs, as well as the inheritance you would like to leave. You may want to discuss your plans with your beneficiaries so they understand the potential effect, although their permission is not normally required.

4. Is there another way to raise the funds I need?  

Equity release is only one way to raise money in later life. There are other options worth considering before deciding to secure long-term borrowing against your home.

The main alternatives to equity release include downsizing, using savings, remortgaging and taking out a retirement interest-only (RIO) mortgage. Each comes with its own costs, risks and practical considerations.

For example, a retirement interest-only mortgage generally requires you to make monthly interest payments and prove that these are affordable. This prevents interest from rolling up in the same way as it can on a lifetime mortgage, but the ongoing repayments will not suit everyone.

Downsizing avoids taking out a lifetime mortgage but means moving home, paying the associated costs and considering the emotional impact of leaving your current property.

Using savings may be simpler, but consider whether you could need that money for emergencies or future living costs.

Depending on your circumstances, other options could include:

• Taking out a conventional or later-life mortgage where repayments are affordable

• Checking whether you qualify for benefits or grants

• Using a smaller personal loan for a limited, short-term expense

• Delaying the expense or reducing the amount you need

• Receiving financial assistance from family

• Taking in a lodger where appropriate

Your financial adviser can talk you through the alternatives to equity release so you do not overlook an option that may be more suitable for your circumstances.

5. Am I eligible for equity release?

Equity release eligibility varies between lenders and products, so there is no standard age and property-value rule that applies to every lifetime mortgage.

Eligibility commonly depends on:

• The age of the youngest applicant

• The property’s value, location, type and condition

• Whether it is your main residence

• Any mortgage or other secured debt

• How much you want to release

• In some cases, health and lifestyle information

Minimum ages commonly start between 50 and 55, depending on the provider. On a joint application, the youngest applicant will generally need to meet the lender's minimum age requirement.

Having an existing mortgage does not necessarily prevent you from taking equity release. However, any mortgage or other secured borrowing will normally need to be repaid when the lifetime mortgage completes. This can be done using some of the money released or other available funds.

6. Do I Understand How the Loan and Interest Could Grow?

Understanding the long-term cost is an important part of deciding whether equity release is right for you.

With a roll-up lifetime mortgage, interest is added to the loan. Compound interest means interest is then charged on both the original borrowing and interest already added, so the balance can grow significantly over time.

Borrowing only what you need, using a drawdown plan so you only pay interest on money once it has been released, and making voluntary repayments can help limit this. However, early repayment charges may apply in some circumstances.

Your personalised illustration should show how the balance could grow. It is also worth comparing interest rates between providers, as even small differences can affect the overall cost.

7. Could equity release affect my benefits, tax or care funding?

Money released through equity release is generally not treated as taxable income, but what you do with it can affect your finances. Keeping the money in savings could reduce means-tested benefits such as Pension Credit or Council Tax Reduction. It could also affect local authority support for care costs.

Your State Pension is not means-tested. However, investing the money could create taxable income or gains. Giving money away may also have inheritance tax and deprivation-of-assets implications.

Releasing money now could leave less property wealth available for future care or unexpected costs, so it is important to check how you could be affected before proceeding.

8. What might change in the future?

A lifetime mortgage can remain in place for many years, so think about how your circumstances could change. You may want to move or downsize, need more money later, repay the mortgage early, or find that your home becomes harder to maintain. Changes such as care needs, divorce, the death of a partner or a new family member moving in could also affect your plans.

Lifetime mortgages meeting Equity Release Council standards include protections such as the right to remain in your home and a no-negative-equity guarantee. You may also be able to transfer the mortgage to a suitable property. 

These protections are important, but they do not prevent compound interest from increasing the debt, remove all early repayment charges or guarantee that every future property will meet your lender’s criteria. 

What next?

If you are still considering equity release, speak to a suitably qualified adviser. They should review your finances and long-term plans, consider alternatives, and explain the potential cost, effect on your estate, benefits, moving options and any early repayment charges.

You should also receive a personalised illustration showing how the lifetime mortgage could work, alongside independent legal advice to help you understand the terms and your obligations.

We work in association with Age Partnership, which offers free initial equity release advice with no obligation to proceed. You can also use our equity release calculator for an indication of how much you may be able to release. A calculator result is only an indication and does not confirm whether equity release is suitable for you.