Equity release explained


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how does equity release work

Equity release has become a major part of later life financial planning for many UK households. Those looking for extra cash are now turning to their home to provide financial support and a more comfortable lifestyle for them and their family.

In this guide we explain all you need to know about what equity release is and how it works.

What is equity release?

The equity in your home is the difference between the value of your property and any loans you have against it. For example, if your property is worth £250,000 and you have a mortgage of £50,000, your equity (what you own) would be £200,000.

Equity release enables UK homeowners aged over 55 to unlock some of the money tied up in their home without having to move. The amount of equity you can access is based on your age and the value of your home. Depending on which product you choose, you can receive the cash either as a one-off lump sum, or as an initial lump sum followed by smaller amounts.  

The cash you release is tax-free and can be used for anything you want – from home improvements to fulfilling lifelong dreams and helping your family. 

Types of equity release

There are two kinds of equity release to choose from:

  1. Lifetime mortgage – This is a loan secured against your home that is repaid once you die or go into long-term care and your home is sold
  2. Home reversion scheme – This is an agreement where you sell part or all of your property to the scheme provider in exchange for a tax-free cash sum. You remain living in your property rent free for life or until you go into care.

There may be alternative ways to access funds that could be more appropriate for you. A professional financial adviser can help you decide whether equity release is right for you and if so, which plan best suits your needs.

How does equity release work?

A lifetime mortgage is by far the most popular form of equity release. It is designed to last your whole life, with interest rolling up over time. There is no obligation to make any monthly payments, but there are options to do so if you choose. 100% of your home belongs to you.

A home reversion plan is very different to a lifetime mortgage. Part or all of your home will belong to the equity release provider, and you have the right to live in it as a tenant for the rest of your life.

With both kinds of equity release the full amount is repaid when you die or move into permanent long-term care, usually through the sale of your home. 

Is equity release safe?

The simple answer is yes equity release is safe. Equity release has cleaned up its act in recent years and is now tightly regulated and closely monitored.

Any company advising on or selling equity release has to be regulated by the Financial Conduct Authority (FCA). You can also check whether they are members of the Equity Release Council, the industry body whose members voluntarily abide by a code of conduct. This code includes the following guarantees:

  • You can live in your property for life or until you move into permanent care
  • You can move your plan to a new home as long as it is acceptable to your equity release provider
  • You will never owe more than the value of your home when it is sold, so your estate will not be liable for any losses.

How long would it take to release equity from my house?       

It usually takes around 6 to 8 weeks to release equity from your home, from making your application to receiving the money. Time frames for arranging a home reversion plan are similar, but it can take a little longer.

In summary

Unlocking some of the cash tied up in your home can make a big difference to you in later life. However, equity release is not for everyone. Make sure you consider any possible alternatives and weigh up the pros and cons carefully:

Advantages of equity release : 

  • You continue to live in your own home at no cost for the rest of your life or until you move into long-term care
  • You will never have to repay more than the value of your home
  • Your estate will never owe more than the value of the property when it is sold 
  • The money you release is tax-free and you can use it as you wish
  • There are no regular payments to make (unless you choose to repay some of the interest on a lifetime mortgage)
  • You can receive the money as a one-off lump sum, or as a smaller lump sum with the facility to draw more when you want

Disadvantages of equity release:

  • The effect of compound interest on a lifetime mortgage means that the amount owed will grow quite quickly over time
  • The amount you can leave as an inheritance will be reduced
  • With a home reversion plan, you waive the right for you or your beneficiaries to benefit from future increases in the value of your home, or the share of it you have sold
  • Your entitlement to certain state benefits may be affected
  • You may be penalised if you decide to repay your plan early.

Before making any decisions, you must consult a qualified financial adviser – ideally one who is independent of any particular provider and a specialist in equity release.

Expertise and impartiality are two reasons why we have chosen to team up with leading independent specialists Age Partnership. Their award-winning team researches plans and providers from across the whole equity release market to find you the most appropriate solution and secure you the best deal.

Next steps

To see how much equity you could release from your home, use our free and easy to use equity release calculator.

Or for free advice from independent equity release specialist Age Partnership, call 0800 133 7380.

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Ways to contact us

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