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Equity release mortgages

You could get a cash lump sum with an equity release mortgage that has no repayments due until your home is sold.

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YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. The FCA does not regulate buy-to-let mortgages for commercial and investment properties.
Author
Atousa Homayounpour
Editor
James Andrews
Last updated
April 21st, 2023
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What are equity release mortgages?

Equity release mortgages allow you to access some of the cash (equity) tied up in your home. You don’t have to pay the money back until you die, go into a care home, or sell the house – so you can free up capital to spend in retirement, without having to move or downsize.

There are two types of equity release. 

  • Lifetime mortgages - you take out a loan against the equity in your home

  • Home reversion plans - you sell all or part of your home now, but continue living in it until you need residential care or die

You can’t access equity release schemes until you’re at least 55, and home reversion plans aren’t usually available until you’re 65 or older. 

Interest on lifetime mortgages is both high and compounded, which means the debt grows quickly. Reputable lenders usually have a guarantee that the debt will be capped at the value of your house, so you won’t leave loved ones with negative equity, but it will reduce the assets you can leave as an inheritance.

So while equity release can be a good way to free up extra income for retirement, it’s not necessarily the right choice for everyone.

How does equity release work?

Equity release schemes advance you some of the money tied up in your house until you go into care or die.

If you opt for a lifetime mortgage, you’ll get a loan secured against the property, which can either be paid to you as a lump sum or as regular income. As with all schemes of this kind, the best equity release rates are reserved for older borrowers.

If you opt for a home reversion plan, the process is slightly different, as these products involve you selling some or all of your home at below-market value. 

Again, the older you are, the better value you’ll get, so many advisers say that while you can access home reversion from 65, it’s often better suited to the over 70s. 

Remember: equity release products are different to remortgaging, which also allows you to access capital in your home, but in return for monthly repayments that cover both the interest and the original loan amount.

With a lifetime mortgage:

  • You still own your home and are responsible for any upkeep

  • Your loan comes with a high rate of interest, which is compounded each day

  • You don’t have to make any repayments now – in most cases, you pay both the capital plus all the interest owed at the end of the term (usually when you go into care or die)

With a home reversion plan:

  • You can stay in the property as a tenant 

  • You don’t have to pay rent

  • But you’ll usually only get between 20% and 60% of the market value of your home, depending on your age and health

Equity release schemes explained

Lifetime mortgages

Lifetime mortgages are loans secured against the value of your property. Available to homeowners aged 55 or over, these mortgages let you borrow money at a relatively high interest rate, and the money does not need to be repaid until you go into residential care or die. At this point, the full capital is repaid, along with any interest. 

The interest is compounded, which means it grows quickly, but you can choose a plan that allows you to pay it off each month. The best plans have a no negative equity guarantee, which means the debt will be capped at the value of the property. With a lifetime mortgage, you still own your entire home.

Home reversion mortgage

A home reversion mortgage involves selling all or part of your home to the provider in return for a lump sum or monthly income. You’ll be paid significantly less than the market rate – typically between 20% and 60% - and the exact deal will depend on how old you are and the state of your health. You'll be able to continue living in your home, rent-free, for the rest of your life. 

At the end of the plan, typically when you die or go into residential care, the property is sold, and the proceeds are divided between you and the lender. This type of equity release scheme is usually limited to those over 65.

Equity release schemes explained

Lifetime mortgages

Lifetime mortgages are loans secured against the value of your property. Available to homeowners aged 55 or over, these mortgages let you borrow money at a relatively high interest rate, and the money does not need to be repaid until you go into residential care or die. At this point, the full capital is repaid, along with any interest. 

The interest is compounded, which means it grows quickly, but you can choose a plan that allows you to pay it off each month. The best plans have a no negative equity guarantee, which means the debt will be capped at the value of the property. With a lifetime mortgage, you still own your entire home.

Home reversion mortgage

A home reversion mortgage involves selling all or part of your home to the provider in return for a lump sum or monthly income. You’ll be paid significantly less than the market rate – typically between 20% and 60% - and the exact deal will depend on how old you are and the state of your health. You'll be able to continue living in your home, rent-free, for the rest of your life. 

At the end of the plan, typically when you die or go into residential care, the property is sold, and the proceeds are divided between you and the lender. This type of equity release scheme is usually limited to those over 65.

Who is eligible for an equity release mortgage?

Equity release is only available to older homeowners. To qualify you must:

  • Own your own home, usually with no outstanding mortgage – although some lenders will consider you if you have a small mortgage left

  • Be at least 55 years of age for lifetime mortgages and at least 65 for home reversion plans – although some deals require you to be older

  • Ensure your home is in good condition

  • Be able to afford associated charges such as arrangement fees, valuation fees, completion fees and solicitor’s fees

It’s also worth noting that equity release may not be suitable if you still have dependents living at home.

Advantages and disadvantages of equity release mortgages

Pros

Allow you to release capital without having to downsize or move
Mean you can use the equity in your home to boost your income
No negative equity guarantees and ring-fencing can limit inheritance implications
No need to repay the loan while you’re still alive and living at home
Some mortgages let you repay interest or capital to keep the cost down

Cons

High interest rates on lifetime mortgages mean the debt grows quickly
Your loved ones will receive less inheritance
The family home is typically sold to pay off the loan
Home reversion schemes pay less than selling on the open market
You may lose means-tested benefits, including pension credit and council tax support

How much equity release can I get from my property?

This will depend on how much your home is worth and the type of product you use. 

If you don’t know your home’s value, property portals and estate agents can be a quick and free way to get an estimate. This amount minus any remaining mortgage is the amount of equity you have – although lenders' calculations may differ slightly.  

If you get a lifetime mortgage, you can usually access between 25% and 60% of the equity. Usually, the older you are, the more you'll be able to borrow.

With home reversion schemes, you’ll typically be offered between 20% and 60% of what the agreed share in your property is worth. Again, the older you are, the better the value you’ll get.

Our handy equity calculator can help you work out how much equity you own. To easily work out how much tax-free cash you can free up from your property, you can also try using an equity release calculator or a lifetime mortgage calculator.

What else should I know about equity release mortgages?

When you're looking at equity release plans or companies, look for schemes that are approved by the Equity Release Council (ERC). Also, look for equity release providers that are regulated by the FCA (Financial Conduct Authority). You can check their register to find out.

  • Interest rates on lifetime mortgages –These are typically high, so it’s worth doing some equity release comparison. Most providers offer fixed rates, but you can get variable ones too

  • A no-negative-equity guarantee – A good equity release loan should have a “no negative equity guarantee”. This means your family will never have to pay back more than the value of your property when it's sold - even if house prices have fallen

  • Interest payments – You should check whether your equity loan lets you repay some of the interest as you go along. If you can manage to do this, it lowers the cost of equity release considerably

  • Minimum withdrawal sum: – Ask if there's a minimum sum you can withdraw each month or a minimum lump sum. This will help you work out the total cost of accessing your equity

  • Below market rates – With home reversion schemes, you’ll get less than you would if you sold on the open market. This isn’t an upfront fee but it does cost you money

  • Losing benefit entitlement – Having lots of money in your bank account may reduce the benefits you are entitled to, including help with the cost of care. The value of your home is not included in means testing as long as you live there – but cash in the bank is

What costs are involved in equity release?

Equity release costs to be aware of include the interest you will pay on a lifetime mortgage and the amount you will lose by choosing a home reversion scheme, as well as:

  • Arrangement or application fees – Some products carry no fees, while others cost hundreds of pounds 

  • Solicitors’ fees – Rates can vary substantially. Shop around and look for recommendations before appointing a lawyer

  • Valuation fees – The cost of having the home valued so that lenders know how much it is worth and what they can loan you. The fee is charged when you apply and is non-refundable

  • Completion fees – These cover the cost of setting up the mortgage and may include the lender’s legal costs and transfer fees

  • Adviser fees – These fees vary significantly, with some brokers charging thousands of pounds. However, taking advice can help make sure equity release is right for you, so shop around for the right adviser

Alternatives to equity release

Remortgaging

With remortgaging, you borrow against the value of your house and repay the amount borrowed over a set time. Just like the mortgage you took out when you first purchased your property, your monthly repayments cover the interest and the original debt. 

Some lenders have age restrictions, so you may be limited in the deals you can access. Check out our remortgage comparison page to see what’s available.

Accessing your pension

If you’re over 55, you should be able to access money in any defined contribution pensions you have. There are various ways of doing this, and the best approach will depend on your circumstances. You can buy an annuity (a guaranteed income for life) although these tend to offer poorer value. 

Alternatively, you can take up to 25% of your pension as an income tax-free lump sum. You can also forgo the tax-free lump sum and have 25% of your withdrawals tax-free each year instead.

Downsizing

If you live in a large property, you also could consider moving to a cheaper, smaller home. However, make sure you do the maths carefully, as you may not save as much as you think. 

If you want to be in the same area, for example, you might find you need a fairly big budget. And once stamp duty, agent’s fees, and moving costs are factored in, it might be more hassle than it’s worth. 

Rent a room scheme

If you have a spare room in your home, then you can rent out that room as part of the government’s Rent a Room scheme, which allows you to earn up to £7,500 a year in rent tax free. 

The room has to be furnished, but if you don’t mind the idea of living with someone, this can be a nifty way to get an extra income without selling up or taking out loans and mortgages.

Alternatives to equity release

Remortgaging

With remortgaging, you borrow against the value of your house and repay the amount borrowed over a set time. Just like the mortgage you took out when you first purchased your property, your monthly repayments cover the interest and the original debt. 

Some lenders have age restrictions, so you may be limited in the deals you can access. Check out our remortgage comparison page to see what’s available.

Accessing your pension

If you’re over 55, you should be able to access money in any defined contribution pensions you have. There are various ways of doing this, and the best approach will depend on your circumstances. You can buy an annuity (a guaranteed income for life) although these tend to offer poorer value. 

Alternatively, you can take up to 25% of your pension as an income tax-free lump sum. You can also forgo the tax-free lump sum and have 25% of your withdrawals tax-free each year instead.

Downsizing

If you live in a large property, you also could consider moving to a cheaper, smaller home. However, make sure you do the maths carefully, as you may not save as much as you think. 

If you want to be in the same area, for example, you might find you need a fairly big budget. And once stamp duty, agent’s fees, and moving costs are factored in, it might be more hassle than it’s worth. 

Rent a room scheme

If you have a spare room in your home, then you can rent out that room as part of the government’s Rent a Room scheme, which allows you to earn up to £7,500 a year in rent tax free. 

The room has to be furnished, but if you don’t mind the idea of living with someone, this can be a nifty way to get an extra income without selling up or taking out loans and mortgages.

Can I get equity release advice?

There's a lot to think about before releasing equity from your home, so professional equity release advice can be a worthwhile investment.

You need to be clear about the effect that this type of mortgage will have on the equity you hold in your home, as well as what it means for how much you can pass on to your family.

A specialist equity release mortgage broker or independent financial adviser (IFA) can talk you through the pros and cons of equity release, and help you answer the question: is equity release a good thing? 

If you decide to go ahead, an adviser can also recommend the best equity release deals for your needs.

“If you're looking to boost your disposable cash or are concerned about the rising cost of living, an equity release mortgage might be an option for you. However, there are risks involved so you need to make sure that it’s the right choice for you.”
Author image
Atousa Homayounpour
Content Producer - Mortgages

Equity release FAQs

Can I take out an equity release scheme if I’m under 55?

No, and you may need to be even older than that. The minimum age for equity release is 55, and this usually only applies to lifetime mortgages. For home reversion schemes, you typically need to be at least 65. With both types of schemes, you’ll also generally get better deals the older you are.

Is equity release safe?

Equity release mortgages are regulated by the Financial Conduct Authority (FCA). The sale of equity release and advice given around it is also governed by the Equity Release Council (ERC). Look for schemes with “no negative equity” guarantees and, if possible, get professional advice.

What happens on death with equity release mortgages?

When you die, any amount you owe to the equity release provider will need to be repaid within 12 months. Normally this can be done by selling the property, although your beneficiaries can also choose to pay off the loan and keep the property if they can afford to do that.

How risky are equity release mortgages?

Because the interest compounds, the debt grows rapidly. This means when the home is sold there may be no equity left – although some products allow you to ring-fence a percentage of the property value for your loved ones. 

Choosing a property with a no negative equity guarantee, meanwhile, means you will never owe the equity release provider more than your property is worth.


How do I pay interest on equity release?

There are two ways you can pay off equity release interest:

1. Deferring interest on equity release

If you take out a lifetime mortgage and choose to roll up the interest, it compounds and then is paid when the house is sold. In other words, the amount you owe will essentially double every 15 years. This is a reason to be cautious of lifetime mortgages if you hope to leave a good inheritance for your family.

2 . Paying off equity release interest as you go

You can choose to pay off the interest on the mortgage as you go which avoids the risk of compounding. You can also take income over time instead of a big upfront lump sum, which means the amount you owe less interest in the end. 

Can I sell my house if I have an equity release mortgage?

Most equity release plans will allow you to move your mortgage to a new property if you decide to sell your house, as long as the new property meets the lender's criteria. However, you might end up paying early repayment charges, so it’s worth considering this when doing equity release comparisons.

What are the pitfalls of equity release?

Releasing equity from your home means your family won't inherit all of it. In some cases, the equity release company will end up owning the property outright.

If, for example, you take out an equity release mortgage when you're 55, and then live until you're in your 80s or older, you'll incur a big debt over the years.

Equity release schemes involve various costs, including a range of upfront fees.

Increasing your income or level of savings can affect the benefits you receive.

Can my partner or spouse continue to live in the house after I die?

If you and your spouse or partner take out a joint equity release plan as co-owners of the property, the sale of the property can only go through once both of you die or go into long-term care. However, if you do not have a joint plan, the surviving partner may have to vacate the property if the equity release plan holder dies or goes into care.

What is a negative equity guarantee?

A no negative equity guarantee means neither you nor your beneficiaries will ever owe the equity release provider more than your property is worth – even if falling house prices mean the loan value is higher than that of the property.

Will taking out an equity release mortgage affect my state benefits?

Yes, taking out a lifetime mortgage or using a home reversion plan can result in you losing means-tested benefits, including pension credit, council tax support and the Cold Weather Payment. This is because you will have more cash in savings and/or more income each month.

About the author

Author imageAtousa Cunnell
Atousa Cunnell
Atousa is a Content Producer for money.co.uk, responsible for writing and editing a wide range of mortgage content that are helpful to the reader.

money.co.uk is not a mortgage intermediary and makes introductions to Mojo Mortgages to provide mortgage solutions.

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