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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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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. That means you can free up capital to spend in retirement, without having to move or downsize.

There are two types of equity release. 

  • Lifetime mortgage: enables you to take out a loan against the equity in your home

  • Home reversion plan: allows you to sell all or part of your home now, but to continue to living in it until you need residential care or die

You can’t access equity release schemes until you’re at least 55 years old. Home reversion plans aren’t usually available until you’re 65 or older. 

While equity release can be a good solution for homeowners who want to free up extra income for retirement, there are considerations and it’s not right for everyone. 

Interest on lifetime mortgages is both high and compounded, which means that 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.

How does equity release work?

How does equity release work?

Put simply, equity release works by advancing you the money tied up in your house and saying you don’t have to repay it 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. You still own your home and are responsible for any upkeep. Your loan will come with a high rate of interest, which is compounded each day.

You don’t have to make any repayments now, instead, the interest is rolled up and you pay both the capital plus all the interest owed at the end of the term (usually when you go into care or die).

If you opt for a home reversion plan, the process is slightly different. These products allow you to sell some or all of your home at below-market value. You’re allowed to stay in the property as a tenant and you don’t have to pay rent. 

You’ll usually only get between 20% and 60% of the market value of your home, depending on your age and health. This is because you’re allowed to continue living there, and the company is taking on risk in terms of when the property is sold and what will happen to house prices.

The older you are, the better value you’ll get, so many advisers say that while you can access home reversion from 65, this sort of product is often better suited to over 70s. 

It’s important to note that both kinds of equity release products are different to remortgaging. If you remortgage, you can also access capital in your home, but you’ll have to make monthly repayments to cover both the interest and the original loan amount.

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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 all of your home.


Home reversion mortgage

A home reversion mortgage is when you sell all or part of your home to a 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. You’ll need to meet the following criteria:

  • 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 will require you to be older

  • Ensure your home is in good condition

  • Be able to afford charges including arrangement fees, valuation fees, completion fees, and solicitor bills

  • If you have dependents living at home these arrangements may not be suitable, and you should take advice to understand your position

Advantages and disadvantages of equity release mortgages

Pros

  • Release capital without having to downsize or move

  • Use the equity in your home to boost your income through retirement

  • 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 debt small

Cons

  • High interest rates on lifetime mortgages mean the debt grows quickly

  • Less inheritance for your dependents as you’ll need to repay the debt

  • 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

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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 the value, property portals and estate agents can be a quick and free way to get an estimate. If you still have any mortgage outstanding, deduct this from the value to find the equity. When you apply, the lender will do their own valuation, so bear in mind that what you’ve calculated 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 sell a share for a below-market rate. Typically, you’ll be offered between 20% and 60% of what the property share is worth. The older you are, the better the value you’ll get.

An equity release calculator is a tool you can use to work out how much tax-free cash you can free up from your property. 

This could help you decide whether equity release on the property is something you'd like to go ahead with or not. A lifetime mortgage calculator does the same thing.

What costs are involved in equity release?

There are several equity release costs to be aware of. These include the interest you pay or the cost of the financial product, as well as other fees and charges.

  • Arrangement or application fee: 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

  • A valuation fee: This is 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

  • A completion fee: This covers the cost of setting up the mortgage and may include the lender’s legal costs and transfer fees

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

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 shop around. Most providers offer fixed rates, but you can get variable ones too. The lower the rate, the less the debt will cost overall

  • A no-negative-equity guarantee: A good equity release loan should have a “no negative equity guarantee”. This means your family won't have to pay back more than the value of your property when it's sold after you've died

  • Interest payments: Check whether your equity loan lets you repay some of the interest as you go along. In the long run, this makes the cost of equity release lower and stops the effect of rolling up

  • Minimum withdrawal sum: See 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 what you're paying to access 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 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 any means test as long as you are living there – but cash in the bank is

Alternatives to equity release

Remortgaging 

Another way you can access the capital in your home is by remortgaging. This lets 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 deal you can access. Have a look at 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 be poorer value. Alternatively, you can take up to 25% of your pension as a tax-free lump sum. The remaining amount can be taken as needed, but you will pay income tax. 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-ish property then you 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 near amenities and stick to your local area, then you might find you need a fairly big budget. Once stamp duty, agent fees and moving costs are factored in, you could discover it’s a lot of hassle for very little gain.

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. You can charge up to £7,500 a year in rent and not pay tax on the income. The room has to be furnished, and you’ll have the added burden of someone living in your house. However, 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 if you are considering releasing equity from your home. You want to be sure you are making the right decision, so consider paying for professional equity release advice.

A specialist equity release mortgage broker or independent financial adviser (IFA) can talk to you about the process and cost of equity release. They can also help you answer the question: is equity release a good thing? 

It's a good idea to use equity release advisers for this kind of product, to make sure you fully understand what you're doing. You need to be clear about the effect that this type of mortgage will have on the equity you hold in your home. You also need to look at the amount of equity that you'll be able to pass on to your family.

If you do decide to go ahead, an adviser can recommend the best equity release company for you, as well as which ones to avoid.

Nisha Vaidyaquotation mark
If you're looking to boost your disposable cash or are concerned about meeting the rising cost of living, an equity release mortgage might be an option for you. However, you should carefully consider whether the positives outweigh the risks.
Nisha Vaidya, Mortgage Editor

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