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What is equity release and how does it work?

Simon Stanney - Equity release director

Simon Stanney

Equity Release Director

Last updated 10th March 2020

Equity Release is a way to access some of the money tied up in the value of your home if you are over the age of 55. You can release the money as a lump sum or in instalments.

There are different plans that allow you to release this cash, either by taking out a loan secured against your home, or by selling part or all of it. The two main types are lifetime mortgages (the most popular option) and home reversions schemes.

Some of the reasons people look at equity release are to live comfortably in retirement, fund home improvements or to help a family member with a cash gift.

What is equity?

The equity in your home is the market value of your property minus any outstanding mortgage or other debt secured against it.

With the most common type of mortgages, your equity increases as you make mortgage payments and as your property increases in overall value.

Over the years, property prices in the UK have risen. So, if you bought your home some time ago, you could now find yourself with a good amount of equity.

Here are a few examples:

  • If your home is worth £350,000 and your mortgage is paid off, you would have £350,000 equity
  • If your home is worth £250,000 and you have an outstanding mortgage of £50,000, you would have £200,000 equity
  • If your home is worth £150,000 and you have an outstanding mortgage of £20,000 and an additional secured loan from your mortgage lender of £5,000, you would have £125,000 equity

The exact amount of equity you can release will depend on your age and personal circumstances.

Use our 60 second equity release calculator

Use our 60 second equity release calculator

Use our equity release calculator

Use our 60 second
equity release calculator

Release tax-free cash from your home

How does equity release work?

To be eligible for an equity release plan, you’ll need to be a UK homeowner of a qualifying property and be age 55 or over.

Depending on the plan, you can release the money as a lump sum or in smaller instalments, and it’s up to you how you spend it.

The money you release will need to pay off any outstanding mortgage first. The rest is yours to spend as you wish, for example on home improvements or to help your family.

It’s a tax-free sum you can use however you like.

Once you’ve accessed your money you won’t have to make any monthly repayments. If you’d like to pay off the interest of the loan monthly, some plans offer this option.

With the most popular form of equity release, the outstanding loan (plus interest if unpaid) will be paid back when you sell your house – which will usually be when you pass away or move out permanently (into residential care).

How long does equity release take?

Releasing equity takes on average around 8-12 weeks. Choosing a specialist equity release solicitor can help ensure your application runs smoothly and your money is in your bank account as soon as possible.

Be sure to keep this timeframe in mind if you’re planning on making any purchases.

Equity release: the process

The equity release process can vary from person to person and provider to provider.

Here's an idea of the steps you can expect:

  • Have a chat with a provider to find out whether you're eligible
  • Talk to an equity release adviser - over the phone or in person
  • Arrange a follow up meeting to talk through the advice that was given to you
  • Fill in your application with help of your adviser
  • Talk to a solicitor to make sure you get independent legal advice
  • Get your money
happy friends in a kitchen

Types of equity release schemes

There are two main ways to release the equity tied up in your home without having to move.

  • Lifetime mortgage - the most popular equity release scheme, where you borrow money against the value of your home.
  • Home reversion scheme - where you sell all or part of your property in exchange for money

An expert adviser will be able to help you decide which type of equity release scheme suits you best and how much you could release.

Lifetime mortgage

A lifetime mortgage is a loan for an agreed amount of tax-free money secured against your home. It is available to UK homeowners aged 55 and over.

You continue to own the property and don’t need to make monthly repayments.

Instead the money you borrow, and any interest accrued, is paid back when you die or go into residential care.

If there is any money left over once the loan has been repaid, this will go to your estate.

Types of lifetime mortgage

There are different types of lifetime mortgage and a range of features to choose from including:

Find out more about the different types of lifetime mortgage

Lifetime mortgage important considerations

House price fluctuations

As house prices fluctuate you can’t predict how much, if any, of your home’s value could go to your estate. If this is a concern, ask your adviser for lifetime mortgages that guarantee an inheritance for your family.

Interest

Lifetime mortgages usually have a fixed rate of interest, although products with a variable rate are available.

Interest on lifetime mortgages compounds, or is ‘rolled up’ each year. This means that interest is calculated annually based on the loan amount plus the interest added in previous years.

If you’d prefer to keep the interest down, some lifetime mortgages do let you pay off interest each month. Learn more about interest rates.

Early repayment

If you decide to pay off the loan, you may incur early repayment charges. Be sure to check with your provider what their terms are.

Home reversion

a home reversion scheme lets you sell part or all of your home in return for a tax-free lump sum or a regular income. It is available to homeowners aged 65 and over.

The price the scheme provider pays is below market value because you also get the right to stay in your home. You can live there rent-free until you die or move out permanently.

When this happens, your home will be sold and you or your estate will receive the value of your share. This will be the amount your home sold for minus the share you sold to the equity release provider originally. You’ll also need to check with your particular plan provider if there are any fees or charges when your house is sold.

This means you’ll know exactly what percentage of your home’s value will be left to your estate on your death.

Home reversion scheme important considerations

House price fluctuations

If the value of your home has risen by the time it is sold, you or your estate will only benefit from the increase in your remaining share of the property.

Early sale

You may lose out if you die or move out permanently after taking out a home reversion plan. However, some plans do provide some protection against this.


What's the difference between the two schemes?

There are two major differences between a lifetime mortgage and a home reversion plan:

Home ownership

With a lifetime mortgage you still own 100% of your home. With a home reversion scheme, you don’t because you sell all or part of your home.

Interest payable

With a lifetime mortgage, compound interest builds up over the years. This increases the amount owed when the property is eventually sold.

With a home reversion scheme, there is no interest to pay or repayments to be made. The provider allows for interest in the price they pay for the share you sell them, and you continue to live in your home rent-free.

All types of equity release product will reduce the value of your estate and could affect your eligibility for state benefits.

couple sat on the sofa, husband showing wife the newspaper

Is equity release regulated?

Equity release schemes, providers and advisers are regulated by the Financial Conduct Authority. The products themselves also offer assurances to the customer.

Most providers are now members of the Equity Release Council and abide by its standards and principles.

This includes a ‘no negative equity guarantee’, which means you will never need to pay back more than the value of your home.

Always check the ERC register to make sure the person or company you’re dealing with has signed up to this industry body’s code of practice.

Read our is equity release safe article to find out more.


Is equity release right for me?

If you have money tied up in your home, and you’re looking for a way to fund a more comfortable retirement, equity release could be a way to boost your finances.

It could help top up your pension or other income when you stop working – and you can use the money to maintain or enhance your lifestyle in later life.

You’ll need to meet certain conditions in order to qualify for equity release plans. If you meet the criteria below, then you could be eligible.

  • You're 55 or over
  • You're the owner of a qualifying property in the UK
  • Your property is worth £70,000 or more

If you have enough spare cash or other investments that will allow you to maintain your lifestyle or other spending goals in retirement , then equity release is less likely to be right for you.

How does equity release affect benefits?

It’s important to remember that equity release can affect benefits you receive and may impact benefits that you might become eligible for in the future.

If you receive or may need to apply for means-tested benefits, they may be reduced, or you will no longer be eligible for them. These include:

  • Pension Credit
  • Universal Credit
  • Council Tax Support
  • Jobseeker's Allowance
  • Income Support
  • Employment and Support Allowance

A specialist equity release adviser will be able to advise what will happen to your benefits if you take out a plan.

They’ll talk you through the details and help you decide whether equity release is right for you.

Read the pros and cons of equity release to find out more.


Understanding the terms you should know

When researching equity release, some of the terms and phrases can be confusing.

To make things clearer, we’ve created this glossary that explains the terms you might come across.

APR

Stands for Annual Percentage Rate also referred to as the Effective APR. The annual interest rate payable on a loan.

Arrangement fee

The money you pay to your provider to cover the various administration costs involved in releasing the equity from your home.

Beneficiary

The person or people you nominate to receive the proceeds of your estate when you die.

Compound interest

Interest accrued on a lifetime mortgage that is added to the loan amount and then future interest is charged on top. In other words, interest paid on interest. See also Lifetime Mortgage.

Downsize

Selling your home and buying another property (typically smaller) of lesser value to live in. Find out more about downsizing and equity release.

Drawdown lifetime mortgage

An equity release mortgage with the facility to draw money out as and when you need it, up to an agreed limit. Interest is only charged on the loan when money is released to you. Read our what is a drawdown lifetime mortgage article.

Early repayment charge

A fee required by a provider if you pay off a lifetime mortgage early.

Equity

The market value of your house, minus any outstanding mortgage debt and other loans secured on it. If you own your home outright, then 100% of the equity is yours.

Equity Release

A financial arrangement that allows you to benefit from the value of your home whilst continuing to live in it, either by borrowing against it or selling all or part of it, for a cash lump sum or a regular income. See also Home Reversion Plan and Lifetime Mortgage.

Equity Release Council (ERC)

The industry body that represents providers, qualified advisers, lawyers, intermediaries and surveyors who work in the sector. Members must adhere to the Council's Statement of Principles which puts in place safeguards and guarantees for you.

Estate

Everything you own (e.g. property, investments and possessions) when you die less any money you owe.

Financial Conduct Authority (FCA)

The independent body responsible for regulating the conduct of financial services firms and markets in the UK, to ensure consumers get a fair deal. The Financial Conduct Authority is the conduct regulator for 56,000 financial services firms and financial markets in the UK and the prudential regulator for over 18,000 of those firms.

Freehold

Outright ownership of a property including the land it’s built on. See also Leasehold.

Home Reversion Plan

A scheme that enables you to sell part, or all of your home to a provider at a reduced price in exchange for a tax-free cash lump sum. Ownership of your home passes to the provider, but you can continue to live there for the rest of your life, rent free. Read our what is a home reversion plan article.

Impaired life

When the provider allows more equity to be released from your home if you have health problems.

Income

Receiving money on a regular basis rather than as a one-off lump sum. See also Lump sum.

Inheritance protection guarantee

A feature that allows you to protect a portion of your home's value so you can guarantee an inheritance for your loved ones.

Joint plan

A scheme that includes another person living with you, such as your spouse. Should one of you die or go into care, the other person can continue to live in your home until they die or move out permanently.

Leasehold

Ownership of the property and its land for the duration of a lease agreement with the freeholder. At the end of the lease, ownership returns to the freeholder. See also Freehold.

Lifetime lease

Legal authority to stay in your home rent-free for the rest of your life or until you permanently move in to long-term care. See also Home Reversion Plan.

Lifetime mortgage

A lifetime mortgage is a loan secured on your home, which is repaid with interest, when you die or go into long-term care. You maintain ownership of the property and continue to live there. See also Compound interest.

Loan to value (LTV)

This is the size of your mortgage in relation to the value of your property. It is usually shown as the percentage of your home that is mortgaged (e.g. 60%), with the balance being the percentage of the property that you own outright (e.g. 40%).

Lump sum

Taking a one-off cash amount upfront rather than receiving a regular income. See also Income.

Negative equity

When the value of a property is less than the debts owed on it.

No-negative equity guarantee

An assurance that neither you nor your beneficiaries will ever owe more than the value of your home. All ERC members must honour this guarantee. See also Equity Release Council.

Portable / Portability

The right to transfer a scheme to a new home provided the new property is acceptable to your provider. All ERC members must include this feature in the schemes they offer. See also Equity Release Council.

Personalised illustration

A quotation presented in the format required by the Financial Conduct Authority (FCA) to aid customer understanding. Also referred to as a Key Facts Illustration.

Secured loan

A way of borrowing money using an asset, such as your home, as a guarantee. If you don’t keep up repayments, the lender can repossess this asset and sell it to get their money back.

Solicitor

A qualified legal professional engaged to provide legal advice and support to clients. When arranging the release of equity from your home, a solicitor can be engaged to review contractual arrangements and prepare any legal documentation required.

Solicitor’s fees

The money you pay to your solicitor for providing legal services.

Tax-free

The money you release from your home is free of both Capital Gains Tax and Income Tax.

Valuation

The formal assessment of a property’s value based on its condition and the current housing market, usually carried out by a surveyor on the provider’s behalf.

We hope this glossary sheds light on some of the jargon you may come across when considering your equity release options.

Getting advice

information icon The information in this article is provided for general guidance only and is not offering financial advice.

Equity release is a financial commitment related to your home, so it’s a big decision. As well as providing a roof over your head, it’s also a valuable asset and may form a significant part of your estate.

There’s a lot to consider, so it’s important to get professional advice. This can be from a specialist adviser, a solicitor or both to help you decide if it’s the right option for you.

Want to talk to somebody about Equity Release?

Call our UK helpline FREE on 0800 633 5566 or request a call back

Here's the information that you need to know about who we are and the other companies that we work with in order to provide our products and services.

Who are SunLife?

Phoenix Life Limited trades as SunLife and is the provider of the Guaranteed Over 50 Plan, SunLife Insurance and the life insurance policy payment option for Funeral Plans. Phoenix Life Limited’s registered office is at 1 Wythall Green Way, Wythall, Birmingham, B47 6WG (registered in England, no. 1016269). 

SunLife Limited distributes financial products and services and is a company limited by shares, registered office: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG (registered in England, no. 05460862). SunLife Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (registration no. 769427).

You can contact us by post at SunLife, PO Box 1395, Peterborough, PE2 2TR or by phone on 0800 008 6060.

If you choose to add Funeral Benefit Option to your Guaranteed Over 50 Plan, Dignity Funerals Ltd arranges and provides the funeral services, registered office: 4 King Edwards Court, Sutton Coldfield, West Midlands, B73 6AP (registered in England and Wales, No. 00041598). Dignity Funerals Ltd is a member of the National Association of Funeral Directors.

Who provides the Funeral Plans?

Dignity Funerals Ltd arranges and provides the funeral services, registered office: 4 King Edwards Court, Sutton Coldfield, West Midlands, B73 6AP (registered in England and Wales, No. 00041598). Dignity Funerals is not authorised or regulated for this activity by either the Financial Conduct Authority or the Prudential Regulation Authority. Dignity Funerals Ltd is a member of the National Association of Funeral Directors.

The life insurance policy that pays for your funeral will be provided by Phoenix Life Limited, trading as SunLife.

Who provides SunLife Pet Insurance

SunLife Pet Insurance is arranged and administered by BDML Connect Limited. BDML Connect Limited is authorised and regulated by the Financial Conduct Authority (No. 309140). Registered in England and Wales Number 02785540. Registered Office: 45 Westerham Road, Bessels Green, Sevenoaks, Kent, TN13 2QB.

Who provides SunLife Home Insurance

SunLife Home Insurance is arranged and administered by BISL Limited and underwritten by a panel of insurers. BISL Limited are an intermediary authorised and regulated by the Financial Conduct Authority. Registered in England no. 03231094. Registered office Pegasus House, Bakewell Road, Orton Southgate, Peterborough PE2 6YS.

Who provides SunLife Car Insurance

SunLife Car Insurance is arranged and administered by BISL Limited and underwritten by a panel of insurers. BISL Limited are an intermediary authorised and regulated by the Financial Conduct Authority. Registered in England no. 03231094. Registered office Pegasus House, Bakewell Road, Orton Southgate, Peterborough PE2 6YS.