How equity release works & what it means for you
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 equity release 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 people choose equity release to live more comfortably in retirement, fund home improvements or to help a family member with a cash gift.
On this page
- What is Equity on a house?
- How does equity release work?
- How long does equity release take?
- How old do you have to be for equity release?
- How do I apply for equity release?
- Types of equity release schemes
- What's the difference between the two schemes?
- Can I sell my house if I have equity release?
- What happens when you die with equity release?
- Can you lose your house with equity release?
- Is it regulated?
- Is it right for me?
- A to Z of Equity Release
- Getting advice
What is equity on a house?
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?
Equity release plans are available to over 55s who own a qualifying property in the UK.
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 into long term 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.
How old do you have to be for equity release?
To take out equity release you need to be 55 years old or older. If you’re taking out a joint equity release plan, you both need to be at least 55.
To take out a home reversion plan you must be 65 years of age or more.
There are other criteria to think about before you decide if equity release is right for you.
How do I apply for equity release?
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
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.
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.
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.
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.
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.
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.
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:
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.
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.
Can I sell my house if I have equity release?
If you want to sell your house, you will have to check with your equity release provider first. Some providers will let you move your plan to a new property.
This will depend on a few factors, including whether the new property will be able to pay back the loan once you die or move into long-term care.
What happens when you die with equity release?
When you die, your equity release provider will need to be notified. Your home will be sold and the equity release loan will be repaid in full.
If you have a joint equity release scheme, when one policy holder passes away, the provider will need to be informed. You will still have the right to live in your home until the last policyholder dies or moves into permanent care.
Can you lose your house with equity release?
You cannot lose your house with an equity release lifetime mortgage. It’s a loan you take out against the value of your home and is repaid by the sale of your house when you die or go into long-term care.
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.
Equity release definitions and important terms
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.
Stands for Annual Percentage Rate also referred to as the Effective APR. The annual interest rate payable on a loan.
The money you pay to your provider to cover the various administration costs involved in releasing the equity from your home.
The person or people you nominate to receive the proceeds of your estate when you die.
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.
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.
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 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.
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.
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.
When the provider allows more equity to be released from your home if you have health problems.
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.
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.
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.
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.
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%).
Taking a one-off cash amount upfront rather than receiving a regular income. See also Income.
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.
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.
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.
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.
The money you pay to your solicitor for providing legal services.
The money you release from your home is free of both Capital Gains Tax and Income Tax.
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.
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 financial adviser, a solicitor or both to help you decide if it’s the right option for you.