You don’t have to sell your house to get money out of it, there are ways to release some of the equity stored in your home without having to move out. Esther Shaw explains all
If you’re looking to boost your income in later life so you can enjoy a more comfortable retirement – or if you want to support other family members financially – you might be considering equity release.
This can be a useful tool for those who don’t have sizeable cash savings or investment pots, but who do have wealth tied up in their property.
Equity release is a financial arrangement that lets older homeowners to release a portion of this money as tax-free cash – without needing to sell up.
While using property wealth in this way can help someone build greater financial resilience, many people are unsure of exactly what equity release entails – or whether it’s a good fit for them. In this guide, BeCleverWithYourCash is going to help you understand how it works, who it’s best suited to, and the key benefits and drawbacks – as it does come with risks.
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What is equity release in simple terms?
Equity release allows you to access cash from your property while continuing to live there. The most common type, a lifetime mortgage, works in a similar way to a normal mortgage, with some crucial differences: including no requirement to make monthly payments.
Instead, the loan only needs to be repaid when the homeowner dies or goes into long-term care and the property is sold. At this point the proceeds from the home sale are used to clear the debt.
One important thing to note is that equity release is not a single product. It is an umbrella term for the different types – ‘lifetime mortgages’ and ‘home reversion schemes’ (more below).
Equity release lets homeowners access cash from their property without being required to make monthly repayments. Loans are repaid through the sale of the home once the owner dies or moves into long-term care.
How does equity release work?
You can’t just sign up for equity release on the spot in most cases, to ensure things are done correctly there’s a process involved. Here’s how it works in practice:
- First off, you apply for an equity release scheme, and get advice to confirm it is suitable for your needs; it’s important you understand the costs, risks and impact on inheritance
- Your property then gets valued, and a lender calculates how much you can borrow
- The loan is agreed, typically as a ‘lifetime mortgage’
- Funds are then released either as a lump sum or in smaller amounts
- Interest accrues over time, often rolling up rather than being repaid monthly (though you can opt to pay monthly if you wish to)
- The loan is only repaid when you pass away or enter long-term care, and the property gets sold
One of the key concepts to understand is that if the interest is left unpaid, it will compound each month. Over time, this will make your total borrowing more expensive
Let’s say, for example, that you opted to borrow £30,000 aged 60 at a rate of 6%. Roughly speaking, your debt will double every 12 years, to around £60,000 by the time you turn 72, and to around £120,000 by 84. This shows just how quickly the cost can spiral.
There is one important caveat to all that – you will never owe more than the home is worth overall. This is thanks to something called the “no negative equity guarantee“.
Any loan that meets the Equity Release Council’s Product Standards have to feature this, and it means that you or your estate will never owe more than the property is worth when it is sold.
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What are the different types of equity release?
There are two main types of equity release in the UK:
Lifetime mortgages
A lifetime mortgage is the most popular form of equity release. As with a conventional mortgage, you take out a loan secured against the value of your property. You don’t then make monthly repayments (unless you choose to do so).
Instead, the unpaid interest rolls up and is added to the loan. This is then repaid when the plan ends, typically when the property is sold.
Be aware that rolled-up interest will increase the size of your original debt. This could affect the amount of inheritance you leave behind.
Home reversion plans
With this type, which is less common, you sell a portion of your home to a provider who pays you a tax-free lump sum (typically at below market value). You can continue to live at home rent-free until you pass away. When your home eventually gets sold, the provider gets a pre-agreed percentage of the final sale proceeds.
Who can release equity?
There are strict eligibility criteria:
- Age: You’ll typically need to be aged 55 for a lifetime mortgage (and 60 for a home reversion plan)
- Property ownership: You must own your home in the UK
- Property type: Most lenders require properties to be of ‘standard construction’. Some may place restrictions on ex-local authority homes, leaseholds, or non-standard builds
- Property value: Your home usually needs to be worth at least £70,000
- Usage: The property must be your main residence, as opposed to a buy-to-let or holiday home
- Joint applications: These may be permitted providing all applicants are named as property owners
Note that eligibility criteria can vary between lenders. Do your research before making any decision.
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What can you release money for?
People opt to release funds for a whole range of reasons including:
- Funding home improvements
- Paying for a big holiday
- Supporting family members financially, perhaps to help a loved one get on the property ladder
- Paying off debts
- Boosting retirement income or gaining more financial freedom
What are the pros and cons of equity release?
PROS
- Lets you access tax-free cash
- Means you can stay in your home
- No monthly repayments are required
CONS
- Interest can quickly mount up; you need to balance the short-term ‘gains’ against the longer-term cost
- Equity release will reduce the inheritance you have to leave behind
- It could also affect your entitlement to benefits
- Early repayment charges can be costly
What are the alternatives to equity release?
If you need to access more cash in your later years but decide that equity release isn’t quite right for you, there are a host of other options to consider. These include:
- Downsizing: this can involve a lot of upheaval but will mean your inheritance stays intact. It can also be cheaper and less complicated than signing up for an equity release scheme
- Remortgaging: if you have substantial equity in your property, remortgaging can unlock cash, particularly when rates are low. Just bear in mind that later-life borrowing carries risks, including higher repayments, stricter lending criteria, and extra costs. Research carefully before switching provider
- Retirement interest-only mortgages: one of these gives you a lump sum secured against the value of your property. You then only get charged interest on the amount you borrow. The key difference is that you must pay the interest each month. This can make a retirement interest-only mortgage cheaper than a lifetime mortgage. That said, you will need to pass strict affordability tests
- Using existing savings or investments: before you embark on any of these routes to free up cash, double check whether you have any money stashed away that you can tap into. This may be the simplest solution
Here at BeCleverWithYourCash we can help you explore all your options ensuring that you arrive at the right one for you.
Is equity release right for me?
As equity release can be very complicated, you want to be absolutely sure it’s the right choice before proceeding.
It may be a good fit for you if, say, you have built up significant value in your home but don’t necessarily have large savings. But it isn’t likely to be the answer if you are keen to preserve inheritance.
If you do end up deciding that equity release isn’t for you, all is not lost. There are a number of other ways to boost income in retirement.
Equity release FAQs
How much does equity release cost?
It’s hard to put exact figures on the cost of equity release, but as a guide, you could expect to pay upfront fees of a few thousand pounds, plus ongoing interest (rates can start at 6% but can also be higher). As rolled-up interest compounds over time, this increases the total amount that needs to be repaid. It’s important to add that, no matter how much interest builds up, you will never owe more than your home is worth thanks to the negative equity guarantee lenders are required to give.
What happens when you die or move into care?
When you pass away or go into care, your home is sold and the equity release loan, plus interest, is repaid.
Do I still own my house if I go ahead with equity release?
Absolutely. You remain the legal homeowner, but the lender secures a loan against your property until it’s repaid.
Explore your borrowing options
If you are interested in proceeding with equity release, here’s what you need to do next:
- Research providers in your area
- Use a mortgage calculator
- Check eligibility and affordability
- Seek professional advice
As equity release options, such as lifetime mortgages, don’t work in quite the same way as ‘conventional mortgages’ it’s essential to get advice from a specialist so you understand the implications. You need to ensure you are fully informed, and that you pick a plan which best suits your circumstances.
It’s also important to involve family members in any decision-making, as opting for equity release is likely to have an impact on their inheritance.
