6 things you need to know before using equity release

2024 is likely to see a renewed interest in equity release, according to Legal & General Home Finance.

New data from the provider shows that home improvements continued to be the primary reason that new equity release customers took out a lifetime mortgage last year. 

While equity release can be a useful way for over-55s to borrow money, taking out a lifetime mortgage is a big commitment and needs to be carefully considered.

Here, Which? explains what you need to be aware of first. 

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1. Lifetime mortgages are more expensive than ordinary mortgages 

The most common type of equity release is a lifetime mortgage, where you take out a loan against your property which is then repaid from the proceeds of its sale when you die or move into long-term care.

The amount you can borrow depends on your age and how much your home is worth. You'll need to be at least 55, but the older you are, the more you can borrow. The maximum you can borrow is around 60%.

Compared with ordinary mortgages, interest rates on lifetime mortgages tend to be higher (6.63%, on average, in September 2023, according to Moneyfacts). And unlike ordinary mortgages, you don’t have to make monthly repayments, which makes them even more expensive, as interest builds up from the beginning. 

2. You can reduce costs by spreading out withdrawals

You can opt to borrow a lump sum – where interest is charged on the whole amount at a fixed rate – or take chunks of cash when you need it, only paying interest on the money you've taken. 

This is known as a 'drawdown' lifetime mortgage and will work out cheaper as the impact of compound interest will be lessened.

According to data from the Equity Release Council, between July and September 2023, 53% of customers opted for drawdown lifetime mortgages, while 47% of customers opted for a single lump sum.

3. You can make partial repayments

While you don't have to make any repayments on the amount you've borrowed via a lifetime mortgage until your property is sold when you die or enter long-term care, this means that over time you'll end up owing far more than you initially borrowed.

Choosing to repay a lifetime mortgage early will often trigger a hefty early repayment charge. However, if you want to make partial repayments, you can do this penalty-free for lifetime mortgages that meet standards set by the Equity Release Council. 

These penalty-free repayments are often limited to 10% of the loan per year.

4. You can switch equity release providers

If you already have a lifetime mortgage, you have the option to move to another provider, or to stick with the same provider but move to a different scheme.

In theory, switching your lifetime mortgage could help you to benefit from lower interest charges, which could save you thousands of pounds over the long term. There are hundreds of equity release products on the market, so it can pay to shop around.

Switching a lifetime mortgage will require you to take regulated financial advice – it’s no different to taking out a plan in the first place (even if you’re staying with the same lender).

• Find out more: can you switch equity release plans to get a better deal?

5. There are other ways to borrow

For smaller amounts, borrowing via a personal loan or credit card will be much cheaper. 

You should also weigh up whether you’re able to release money by downsizing. Moving home comes with its own costs, but these are likely to be lower than the amount you’d pay in interest on a lifetime mortgage.

Remember that using equity release will reduce the amount you'll be able to leave behind for loved ones, so it's important to discuss your plans with your family first to help avoid any surprises later on. 

6. You’ll need to get financial advice  

To arrange a lifetime mortgage, you'll need to take regulated advice from a qualified equity release adviser. This is a requirement of the Financial Conduct Authority.

Companies selling equity release must therefore offer advice. The Equity Release Council has a directory of financial advisers with equity release experience.

It’s preferable to opt for an adviser that isn't restricted to recommending products from just one or two firms.

Equity release brokers such as Age Partnership, HUB Financial Solutions and Key Later Life Finance can look across the whole of the market to find the product that meets your specific requirements.

Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665  and is an Introducer Appointed Representative (FRN 610689) of the following:

1. Inspop.com Ltd for the introduction of non-investment motor, home, travel and pet insurance, who are authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 

2. LifeSearch Partners Limited (FRN656479), for the introduction of Pure Protection Contracts and Private Health Insurance, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts and Private Health Insurance Contracts.  LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386.

3. HUB Financial Solutions, for the introduction of equity release advice, who are authorised and regulated by the Financial Conduct Authority (‘FCA’) to provide advice and guidance on financial products for those who have retired or are approaching retirement (FCA Firm Reference Number: 455713). HUB Financial Solutions is registered in England and Wales to Enterprise House, Bancroft Road, Reigate, Surrey RH12 7RP, company number 05125701.

4. Alan Boswell Insurance Brokers Ltd (FRN 301), for the introduction of non-investment landlord insurances, who are authorised and regulated by the Financial Conduct Authority to provide advice and arrange insurance contracts. Alan Boswell insurance brokers Ltd is registered in England at Prospect House, Rouen Rd, Norwich NR1 1RE, company number 02591252.

Other financial services:

Mortgage service provided by London & Country Mortgages (L&C), Unit 26 (2.06), Newark Works, 2 Foundry Lane, Bath BA2 3GZ. London & Country are authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

We do not make, nor do we seek to make, any recommendations or personalised advice on financial products or services that are regulated by the FCA, as we’re not regulated or authorised by the FCA to advise you in this way. In some cases, however, we have included links to regulated brands or providers with whom we have a commercial relationship and, if you choose to, you can buy a product from our commercial partners. 

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