What is equity release?

Mark Gregory

Checked for accuracy and updated on 25 November 2024

Equity release is a generic term thats applies to the withdrawal of tax-free cash from your property. The most popular type of equity release is a lifetime mortgage which starts from age 55. There are a huge range of plans available, which enable you to access some of the money - the equity - that has built up within the value of your home over time. To get an idea of how much you could borrow, why not use our quick calculators?

Unlike traditional, ‘residential’ mortgages, there are no mandatory payments to make (unless you want to), the interest rate is fixed for life and the plan is repaid when you die or move into long term care. Read on to learn more about equity release.

How does equity release work?

Homeowners who bought their property years ago are likely to have seen its value increase, while at the same time they've probably reduced the size of their mortgage on it. The difference between the two is the ‘equity’ in the property. This equity is the money you can access by using an equity release plan - the most common type being a lifetime mortgage. Here's a short video that explains what equity release is -

Taking out equity release is a much simpler way of borrowing money than by using a traditional, 'residential' mortgage. (These are also available for older borrowers in the form of Retirement Interest Only (RIO) mortgages.

That's because equity release lenders only consider the age of the youngest homeowner, where you live and the value of your property when deciding how much they will lend you. They don't take into account your income or outgoings, or aren't overly concerned by your credit history, so the process is much simpler and quicker.

The main downside of equity release is that it is likely to reduce the value of your estate that you leave to your loved ones. This is because you have the option of not making any monthly repayments. If you take this option, then the interest accruing on your plan will ‘compound’ over time. For example, you borrow £100,000 at an interest rate of 4%. After year one, you owe £104,000. At the end of year two you owe 4% of £104,000 - £108,160 etc. After 18 years, the amount to be repaid will have doubled to £202,581.

There are options to manage the interest accruing on a plan including making Adhoc payments, flexible monthly payments, and fixed payments. Remember that property prices can go up or down, and this can affect the amount of money left over for you or your estate after the plan is repaid.

Let’s now look at the different types of equity release available to you – a lifetime mortgage and a home reversion plan.

The different types of equity release plan

What is a lifetime mortgage?

A lifetime mortgage is the most common type of equity release plan and is basically a loan secured against the home you live in. Typically, they run for the lifetime of the homeowner, but as they now come with fixed term early repayment charges, they can be fully repaid, without charge, at some point in the future.

Your property is 100% yours and unlike traditional mortgages, there are typically no monthly repayments to make. All lifetime mortgage plans now allow you to make voluntary repayments to help control the balance, or you could take out an interest-only plan where the interest accruing is repaid monthly. These types of mortgages come with many flexible features to suit your personal circumstances. You can -

• Make repayments either on an ad-hoc or regular basis via voluntary or monthly repayments which can help control the balance over time.
• Choose a plan with fixed term early repayment charges, enabling you to repay it in full, without charge, at some point in the future.
• Protect an element of equity by including an Inheritance Protection Guarantee, which safeguards a percentage of your estate to pass onto your loved ones.
• Take future cash withdrawals if you take out a drawdown lifetime mortgage. Ideal if you want a regular income or don’t need all your money in one go.
• Include downsizing protection and/or compassionate early repayment options, should you need to move or downsize in the future without incurring penalties.

What is a home reversion plan?

A home reversion plan is different altogether to a lifetime mortgage. Here, a home reversion provider buys a percentage (or all) of your property (at less than market value) and in return gives you a tax-free cash lump sum. The homeowners are then given a lifetime tenancy that enables them to live rent-free in the property for the rest of their lives.

By selling a percentage of the value of your house, part of its final value is protected for your beneficiaries. When the last homeowner dies or moves into long-term care, the house is sold, whereupon the respective percentages are then divided accordingly between the lender and beneficiaries.

Don’t worry - this sounds a lot more complicated than it actually is. And what’s more, our friendly advisers will be happy to explain everything in a language that’s easy to understand.

What are the pros and cons of equity release?

The advantages

Financial freedom

At Equity Release Supermarket, no one tells you what you can or can’t do with your money. Whether you want that new kitchen or holiday you’ve always dreamed of, or want to help your children buy their first home or move up the property ladder, it’s up to you how you spend your cash. Your money is tax-free and what’s more, you can take your money as a single lump sum, or in smaller chunks - giving you more flexibility.

Flexibility

One of the most popular reasons people choose an equity release plan is because they are so flexible. For example, if you take out a lifetime mortgage, what you use your money for is entirely your decision.

It’s also possible to release your money as and when you need it via a drawdown equity release scheme, rather than in one lump sum.

Moreover, you can reduce the amount of interest accrued in the long term by releasing less equity, less frequently or, if your income allows, you can make regular or one-off capital repayments.

There are also a wide range of flexible features that you can add onto your mortgage, enabling you to tailor a plan that meets your needs – both now and in the future.

No need to downsize

Equity release means you don’t have to experience the stress, inconvenience, and cost of moving out of your family home to a smaller property. It provides not only financial freedom, but importantly - freedom of choice.

No negative equity guarantee

All the equity release schemes we recommend come with no negative equity guarantees.

What does this mean? If, at the time that your plan is repaid, your house is worth less than the amount you owe, your loved ones won’t be expected to repay the difference to the lender – and so they will never be out of pocket.

The disadvantages

‘Roll up’ or compound interest

As many people choose not to make any interest repayments over the life of their plan, this means that the interest is ‘rolled up’ or compounded and included in the final repayment when the plan ends – as we explained earlier. The longer the plan runs for, the greater the amount of interest that will have to be repaid.

As previously mentioned, the amount of interest to be repaid can be kept to a minimum by either withdrawing equity in smaller chunks over time (what’s known as drawdown) or by making regular or one-off capital repayments: or both!

With Equity Release Supermarket, you can be sure that your local adviser provides honest and responsible equity release advice, making sure that you are aware of all the potential pitfalls of equity release. If it isn’t right for you and you have other financial options to achieve your goals, we’ll tell you so.

Early repayment charges

In the past, lifetime mortgages could come with hefty early repayment charges (ERCs) for those wanting to fully repay their plan – as they were designed to run for the lifetime of the homeowner.

Positively, that has now changed, and all lifetime mortgages now come with fixed term early repayment charges that work in exactly the same way as they do with fixed rate, residential mortgages.

The shortest fixed term ERC’s are for 8 years from when the mortgage begins. For the first 5 years, the ERC is 5%, then 3% for the next 3 years and after 8 years, the plan can be fully repaid – without charge. So, it doesn't have to be for life!

Reduced inheritance

Because equity release reduces the value of your estate, it will mean a reduced inheritance for loved ones. That said, it is possible to safeguard a proportion of your property with a guaranteed inheritance plan. If this is important to you, make sure you talk this and any inheritance tax implications with your Equity Release Supermarket adviser.

Things to consider

Which equity release scheme is best for you will depend on your personal circumstances and your individual needs.

Lenders will only accept an equity release application following advice from an authorised and qualified equity release adviser.

All our advisers are members of the Equity Release Council, and they will always provide impartial, equity release quality advice from the whole of the market, with no pressure.

This allows you to make a decision in your own time, either in the comfort of your own home or over the telephone or video, whichever suits you best. We would also recommend that the subject of releasing equity should be discussed with your family, and they are welcome to attend any meetings.