What is equity release?
Equity release allows you to get a tax-free cash lump sum or to ‘draw down’ smaller amounts of money as and when it’s needed. An equity release scheme usually gives you the right to continue living in your property until you pass away or move into long-term residential care.
The cash sum raised against the value of your house is repaid when the house is sold. If the home is owned by a couple, the money isn’t usually repayable until the death of the second partner.
There are two main types of equity release scheme:
- A lifetime mortgage: where you’re loaned money against the value of your home.
- A home reversion plan: where all or part of the property is sold to a home reversion company but you retain a right to live there.
With this type of scheme, you’re loaned a lump sum (or can draw down smaller sums as and when you need it) against the value of your home.
The older you are and the greater the value of your property, the larger the cash sum that can be released. For example, if you’re 65 years old, you might be able to borrow up to 25% of your home’s value, whereas if you’re 80 years old, you might be able to borrow up to 40%.
The older you are and the greater the value of your property, the larger the cash sum that can be released.
There’s no time limit or ‘end date’ to the loan. The total sum is only repayable when the property is sold. Most schemes will also have a condition that if you permanently move into a care home, or sheltered or extra care housing, the lifetime mortgage has to be repaid.
Interest is added to the sum monthly or annually, so the total amount owed can go up quite considerably over time. Most schemes don’t let you pay off the interest as you go along – it’s all added to the lump sum at the end.
With a home-reversion plan (sometimes called a home-reversion scheme) you agree to sell a proportion of your property to a home reversion company. This can give you a lump sum of tax-free cash.
Alternatively, you might want to sell a certain percentage now and then ‘draw down’ other amounts later by selling further percentages. The amount owed is not repayable until the property is sold. At that time, the home-reversion company would receive a share of the sale proceeds, relating to the proportion that it owns.
Home-reversion plans give you the right to continue living in your home until you die or move into long-term residential care. It’s important, however, to be aware that with a home-reversion plan (unlike a lifetime mortgage), you will lose sole ownership of your home.
For example, you might own 50% and the home reversion company the other 50%. So, when the property is sold, either you or your beneficiaries won’t get all the proceeds from the sale.
Who is eligible for equity release?
To be eligible for an equity release scheme you need to:
- live in the UK
- own your home outright
- be over a certain age (most schemes have a lower age limit of 60, some 55).
If you’re in a couple, you’re not eligible until the youngest partner reaches the specified age.
The amount of money that can be released is dependent on age(s), property value and sometimes health. This will vary between lenders and the type of plan chosen.
In addition, the property needs to:
- be in a reasonable state of repair
- if leasehold, have at least 75 years of the lease remaining (the loan can be used to extend a lease).
You can find more information about equity release on Which? Money.
Only consider equity release if you’ve explored all other possible options and fully understand the potential costs.
It’s vital to take independent financial advice from a specialist accredited later life adviser, such as a fully listed member of the Society of Later Life Advisers (SOLLA). You could also contact StepChange, a service offering free advice on equity release.
Society of Later Life Advisers (SOLLA)
By choosing an accredited member of the Society, you can be assured of someone with the expertise to best understand your needs to provide advice that is right for you and your family.
For more guidance on finding an IFA, see how to find a financial adviser on Which? Money.
Read our checklist
Remember that equity release is not right for everyone. If you’re considering equity release, there are a few things that you can do or think about, which will help your decision making. See our top tips when considering equity release for more guidance.
Also remember that you will still be responsible for home repairs and buildings insurance once the scheme is in place.
We explain the options for paying for care at home, from local authority support to paying for it yourself.
Home care fees can vary according to where you live in the UK and the type of care you need.
If you are eligible, government funding for home care may be available. We explain the means test and other rules.