Equity release explained Equity release schemes

Equity release schemes allow you to access your property's value for more cash in retirement - but equity release is an expensive, lifetime commitment. 

If you're facing a pension shortfall or need to meet an unexpected expense, equity release can seem attractive. It allows you to tap into the wealth you've accumulated in your property without the hassle of having to move. But before you consider taking this option, there are key aspects of it that you need to know.

What is equity release? Video guide 

In less than three minutes, our video explains the basics and the pitfalls of equity release. Further down, we cover more details and options.


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Video transcript

Many people find themselves needing access to more cash in retirement. But, if you don't have enough savings, could you use the value of your home to boost your finances? Equity release is a way of extracting cash out of your property by effectively taking out a loan secured on your home. It's only available to people aged over 55, and paid back when your property is sold.

There are two types of equity release, a home reversion scheme or a lifetime mortgage. With a home reversion scheme, an Equity release company buys a fixed share of your property from you, say 20%, and then waits for the value of that share to increase. However, because it won't get its hands on anything until the property is sold, the amount the company actually offers to you will be well below the shares actual value.

A 20% advance could mean surrendering 70% of your properties value. Far more common are lifetime mortgages. With these the loan comes with a fixed interest rate, and unlike conventional repayment mortgages you don't pay it off in regular instalments. Instead, your debt is rolled up, which means the interest is calculated on an ever increasing total, and only repay it when the property is sold.

Life time mortgage lenders guarantee you against what is known as negative equity. So, you'll never owe more than the value of your house. Some will let you to pay off a bit of interest as you go. But, if you keep the loan until you die, a large chunk of the sale proceeds could get snapped up, and there won't be much to pass on to your family.

A rolled up loan of �65,000 at a rate of 6.4%, would become debt of almost �137,000 over 12 years. And remember, once you've got a Lifetime Mortgage, it's very costly to change your mind or switch to other deals. Some lenders charge penalties of up to 25% if you repay early. Equity release can be right with some people, but it's a very expensive way to get your hands on some cash, is absolutely crucial that you take independent financial advice if you are considering it. The which money help line has a team of qualified experts that can help answer your questions on equity release.

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Cost of equity release

Equity release doesn’t come cheap. A lifetime mortgage can cost more than three times what you borrow after 20 years, while some home reversion schemes demand more than 70% of your home’s value for just a 20% advance. 

Although the Bank of England base rate is at an all-time low and normal mortgages rates have tumbled, rates for lifetime mortgages (the most common form of equity release) remain high. Average rates have fallen in recent years, but equity release is still very expensive compared with a conventional mortgage.

The Which? Money Helpline has a team of qualified experts that can help answer your questions on equity release. Sign up to a trial with Which? and speak to one of our experts. 

Equity release: types of scheme 

There are two main types of equity release: lifetime mortgages, which allow you to borrow money against your house; and home reversion, whereby you sell a share in your house.

Lifetime mortgages

With a lifetime mortgage, you borrow a proportion of your home's value. Interest is charged on the amount but nothing usually has to be paid back until you die or sell your home. The interest is compounded or 'rolled up' over the period of the loan, meaning your debt could double in 11 years at current rates.

Home reversion schemes

With a home reversion scheme, you usually sell a share of your property to the provider for less than the market value. You have the right to stay in your home for the rest of your life if you wish. When you die or move into long-term care and the property is sold, the provider gets the same share of whatever your home sells for as repayment. For example, if you sold 50% of your property to the provider, it would get 50% of the sale price.

You can take out some lifetime mortgages from the age of 55, but home reversions are available only to people aged 65 or older. Some enhanced products offer more favourable terms if you're a smoker or have health problems that could decrease your life expectancy. 

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