Equity release allows you to draw on the value of your home without having to sell it or move out, helping you to raise funds for your retirement. Increasingly, those aged 55 and over are also opting to release equity in their homes in order to enjoy a higher standard of living.
Releasing equity from your home is a way for you to access cash or a regular income based on the value of your home. As you begin to make plans for you and your family’s future, equity release provides the chance for you to pass on a tax-free legacy to your loved ones, offer children help getting on the housing ladder, or simply the chance to enjoy a higher standard of living in your retirement.
In this piece, we explain the process involved to help you decide whether it is the right choice for you.
Equity release in a nutshell
Equity release is a financial product like a mortgage, personal loan or savings account. However, equity release products are available only to homeowners in higher age brackets who are making plans for their future. There are three basic types of equity release plan:
Type 1: The lifetime mortgage
Lifetime mortgages are a type of loan secured on the value of your home. With this plan, you will receive a tax-free lump sum. There are no monthly repayments. Instead, interest on the loan gathers and, when you die, the loan plus interest is paid using money made from the sale of your home.
You can choose to access the equity you release in one lump sum, or in several smaller amounts over time. Lifetime mortgages are typically available to homeowners aged between 55 and 85, though this varies between lenders.
You may find some lenders will let you pay off monthly loan interest. If you do this, the sale of your home will only be used to pay for the equity borrowed. You may be able to ringfence a portion of the total value of your property, to ensure some of your property can be included in your will.
Type 2: Home reversion plan
There are also equity release reversion plans. With these products, you sell all or part of your home for a tax-free lump sum or regular payments. You also receive a guaranteed lifetime lease of the property and there are no monthly payments to make. This means you’re allowed to live in your home rent-free despite the lender owning all or part of it, however you must insure and maintain the property. After your death, the lender sells the property in order to recoup the share it owns.
Type 3: Retirement interest-only mortgages (RIOs)
Retirement interest-only mortgages, or RIOs, are similar to standard interest-only mortgages. However, there are a few key differences. While a lifetime mortgage requires you to own most or 100% of your home, a RIO mortgage does not. With this type of equity release, you only have to prove you are able to afford the interest repayments each month.
The capital released through the loan is repaid only when you die, sell the property or move into long-term care, in which case the lender will recoup their capital from the sale of the property. There is no minimum age at which you can apply for an RIO, although these products are aimed at people aged around 55 and older.
What are the requirements?
Equity release products are aimed at older people and those in retirement. Many of these products are only available to those aged 55 or older, though this depends on the specific product and the lender.
- Typically, lifetime mortgages are available to eligible homeowners aged between 55 and 85. However, some lenders may offer certain products to homeowners from the age of 50.
- Home reversion plans are usually offered to those aged 65 and above, although some lenders may offer them to those aged 60 and above.
- RIOs have no minimum age requirement but are marketed to people aged 55 and over.
For each of these products, you must be a homeowner and the property you are releasing equity from must be your main residence.
How much can I borrow?
It is important you only ever consider borrowing what you really need and be aware that it could also reduce how much you could earn from means-tested benefits. Most providers of equity release plans guarantee that your debt will never be greater than the value of your home, so the amount available to borrow is strictly limited.
Lifetime mortgages can typically be taken out for anywhere between 20% and 60% of the total value of the property. The exact percentage will depend on the lender as well as personal circumstances, such as the borrower’s current age and health.
Home reversion schemes may cover anywhere from 25% to 100% of the property. Lenders do not charge interest, but they will pay less than the market value. You may get a better rate if you are older, or already in poor health.
The rates for RIOs vary between lenders. Typically, eligible candidates should be able to access up to half the value of the property, provided you already have at least that much equity. Some lenders will offer more, ranging from 55% to a maximum of 75% of the total property value.
How much does a loan cost?
According to data shared by the Equity Release Council, interest rates for equity release in 2024 stand at just over 6% on average, with the lowest available equity release interest rate at 5.16% as of January 2024. However, you should be aware of the effect of compound interest, which can cause debt to mount significantly.
If you borrowed £50,000 at 6% you would accrue £3,000 interest in the first year. In the second year, you would then pay 6% interest on £50,000 plus the first year’s interest of £3,000, increasing your debt to £56,180.
When do I have to pay back the home equity release loan?
As there are usually no monthly payments to make with equity release products, any debt owed would be repaid when you die using money from the sale of your home. To reduce the interest due over the term, you could choose to make regular monthly payments, paying off the interest as you go, or opt to withdraw the money in stages rather than in one lump sum.
With RIOs you repay the interest monthly, and the lender recoups the capital from the eventual sale of your property. With a lifetime mortgage, there are no monthly repayments, and the lender takes the capital plus accrued interest when the property is sold. Home reversion plans also do not attract any monthly repayments.
Check the terms should you become unable to live at home and need to move into a care home, as some equity release plans may make you repay the loan in full at this point.
If you are approaching retirement and looking to free the cash tied up in your home, equity release plans may be the right choice for you. However, it is important to seek professional advice from an independent financial adviser before considering releasing equity from your home.
Are there any downsides?
While many people choose to release the equity from their homes at around retirement age, there can be downsides.
For example, the value of your property will reduce when you release equity. You could also see a negative impact on any state benefits you may be entitled to if you access a lump sum of equity from your property. Also, although lenders set limits to try ensure you do not find yourself in negative equity, it could still be possible if house prices fall drastically.
If you’re a homeowner in the right age bracket and you’d like access to cash, either as a lump sum or as several smaller payouts, equity release could be right for you. However, professional advice from an independent financial adviser is essential before you start. Multiple applications being refused can negatively affect your credit score. You may find there are other financial products on the market that are better suited to your needs, such as personal loans. Also, being turned down by multiple lenders can negatively affect your credit score, so it is advisable to wait until your mortgage broker is confident that any equity release application will succeed before you go ahead.
What else do I need to know?
There is an organisation called the Equity Release Council. This body has created a Code of Conduct to protect people who decided to release equity from their homes. You may prefer to select an ERC-approved lender if you do decide to consider an equity release.
FAQs
Can I sell my house if I have equity release?
The short answer to this is yes, although the exact terms will depend on your lender and the terms of your original agreement. Usually, you will be able to sell a property that you have equity release on if you are not using the money to buy another property, such as if you move in with family. You may also be able to “port” your mortgage across to another property, which again will depend on the terms of your equity release plan.
Is there a better alternative to equity release?
There is nothing to say equity release is better or worse than any other alternative, as this will depend on your personal circumstances. Other options may include products such as personal loans. If you are releasing equity to help children or grandchildren get on the housing ladder, a joint mortgage could be another alternative.
Can you pay back equity release?
Yes - some types of equity release plan will allow you to repay some or all of the money borrowed, although there will most likely be penalties or charges involved. However, as a long-term product, paying off a lifetime mortgage may not be the best option.
You can find more information about home equity release and other personal loans on our Know How blog.
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