How does equity release work?
Equity release lets you unlock some of the capital tied-up in your property and turn it into cash. You can get a tax-free lump sum or ‘draw down’ smaller amounts of money as and when it’s needed.
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.
You can continue living in your property until you sell the house, move into long-term residential care or pass away.
If you need to pay for extra care and support at home in later life, equity release is one funding option to consider. However, it's important to be aware of the costs and the potential pitfalls.
Am I eligible for equity release?
To be eligible for an equity release scheme you’ll need to own your home outright and be over a certain age. Generally, you’ll need to be aged over 55, but for some schemes an older age limit applies. If you’re in a couple, you’re not eligible until the youngest partner reaches the specified age.
In addition, your property will need to:
- be in a reasonable state of repair
- have at least 75 years of the lease remaining, if it’s a leasehold property. The loan can be used to extend a lease.
The amount of money that can be released is dependent on age, property value and sometimes health. This will vary between lenders and the type of plan chosen.
What types of equity release schemes are available?
There are two main kinds 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 the right to live there.
With this type of scheme, you’re loaned a lump sum against the value of your home. Some schemes allow you to draw down smaller sums as and when you need to.
The older you are and the greater the value of your property, the larger the sum that can be released. For example, if you’re 65 years old, you might be able to borrow 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 housing, the lifetime mortgage has to be repaid.
Interest is added to the sum monthly or annually. 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. So, depending on how long you live for, the total amount owed can mount up considerably over time.
Read more about Lifetime mortgages on Which? Money.
Interest-only lifetime mortgages
Some providers now offer lifetime mortgage plans where you can pay off the interest on a monthly basis. The loan itself is still only repayable when the property is sold. As long as you can afford monthly repayments, with this type of scheme the total amount you owe will not increase over time.
With a home-reversion plan (or home-reversion scheme) you agree to sell a proportion of your property to a home reversion company. This gives you a tax-free lump sum in return.
You may want to sell a smaller percentage initially and then ‘draw down’ other amounts by selling further percentages later. The amount owed is not repayable until the property is sold. At that time, the home-reversion company would receive their share of the sale proceeds.
It’s important to be aware that a home reversion plan won’t pay you the market rate for the share of your property that you sell. In fact, the rate will usually be between 35%–60% of the market value. So, as an example, if your home is worth £200,000, the scheme might pay you £50,000 for a 50% share.
On the plus side, you’ll get a tax-free lump sum for selling a portion of your home and you can continue to live in the whole home rent-free for as long as you want to.
It’s important to remember that with a home-reversion plan (unlike a lifetime mortgage), you will lose sole ownership of your home.
The pros and cons of equity release
You can supplement your income with a tax-free lump sum, with nothing to repay until you pass away or sell off the property.
You can continue to live in your home for as long as you want to.
With a lifetime mortgage, you retain sole ownership of the home.
Some schemes offer the flexibility of drawing down smaller lump sums as and when you need them.
With a lifetime mortgage the overall debt can escalate significantly over time.
With a home reversion plan, you won’t get the market rate for the share of your home that you sell. You will also lose sole ownership of your home.
If you release equity on your home, the amount you have in your estate will be reduced.
Most schemes charge an early-repayment fee if you want to pay off the loan early.
Releasing equity could affect your entitlement to means-tested benefits, such as Pension Credit.
Releasing equity could affect your chances of getting local-authority funded care in your home. And if you already get local-authority care, you might have to start contributing to the costs from the equity you’ve released.
You may be allowed to move house without paying back the mortgage, but the property you move to will have to comply with criteria set down by the provider. This may limit your options. Some types of properties, such as sheltered housing for example, may not be acceptable to the provider.
Top tips when considering equity release
Equity release is not right for everyone. Here are some important things to consider before making your decision.
- Equity release schemes are most suitable for borrowing money long term – they aren’t suitable for short-term borrowing.
- Don’t borrow any more than is needed. Interest rates tend to be high and they can really add up over time.
- Consider drawing down smaller amounts as and when you need them, rather than taking the maximum amount all at once. This will minimise the build-up of interest on a lifetime mortgage.
- There can be significant additional costs involved in arranging equity release, including valuation fees, administrative fees, legal charges and insurance. Enquire about these up front so you know what to expect.
- Consider whether property values are likely to rise or fall.
- Falling prices could affect you severely with a lifetime mortgage, as the debt will absorb a greater proportion of your home’s value. A home-reversion plan will not be adversely affected if prices fall or remain static.
- If house prices rise, with a lifetime mortgage you’ll continue to benefit from the increase in your property’s value. With a home reversion plan, however, you won’t get any benefit from the increased value of the share you have sold off.
- If you can afford monthly repayments, consider an interest-only lifetime mortgage. This prevents the total debt from building up over time.
- Many providers have an equity release calculator on their website which can quickly give you an idea of how much you could borrow. Most will require you to enter an email address to view the results. The StepChange calculator does not require an email address.
For more information about how your debt could grow and some of the alternatives to consider, see further equity release advice on Which? Money.
Is equity release right for you?
Only consider equity release if you’ve explored all other possible options and fully understand the potential costs. Before making a decision, take the following important steps.
Think carefully about all the other ways you could cover the costs of care – including property downsizing, using savings, renting a room, local authority funding and state benefits, such as Attendance Allowance.
- Find out more: Paying for care at home
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).
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.
You could also contact StepChange, a service offering free guidance on equity release.
Which? members can also call the Which? Money Helpline for guidance on equity release or any other questions about funding care in later life. It’s part of a Which? membership, so members can get guidance at no extra cost.
If you decide that equity release is right for you, choose a provider that’s a member of the Equity Release Council (ERC) as they will have to abide by a Code of Conduct, and their plan will have a No Negative Equity Guarantee. This guarantees that the total sum payable (borrowed plus interest) will not exceed the ultimate sale value of the property.
Questions to ask a potential provider
- Will they let you transfer your plan to another property, should you wish to move or downsize?
- Is there an early repayment charge should you want to pay off the plan early (for example, if you move to a care home or sheltered housing)? Penalties for early repayment can be high – up to 25% of your original loan – so it’s very important to be clear on what these charges are.
- If necessary, will you be allowed to have other people live with you (such as live-in carers or family members)? Some home reversion schemes may have conditions to prevent this.
Download our equity release checklist
Use our equity release checklist to help you decide if taking out a scheme is right for you.
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