Find out what you need to know about releasing equity from your home.
Unlock tax-free cash from your home
If you’re in or approaching retirement and have owned your home for some time, chances are you’ve benefited from the dramatic rise in UK house prices over recent years. So now you’re living in your most valuable asset, but your pockets are no deeper because the money is actually tied to bricks and mortar. If this sounds like you, equity release can help you unlock some of the cash tied up in your home, without you having to move out.
With more of us living longer, retirement has become a new phase in life to hopefully be enjoyed for many years. An exciting prospect but also a potentially challenging one when it comes to money.
Releasing some of the equity in your home can give you a tax-free lump sum or smaller cash injections to top up your retirement income.
Types of equity release schemes
You borrow against the value of your home while you continue to live in it. You don’t have to make repayments, instead interest is added to the mortgage and both are repaid when the property is sold.
Home reversion schemes
You sell all or part of your home at a reduced price and, in exchange, live rent-free for life in your home and receive a cash lump sum.
Deciding which scheme works for you will depend on your current circumstances and your plans, including:
- The value of your home
- How much equity is available in your home
- Your age
- Whether you would like to leave an inheritance
- Whether you want to retain ownership of your home
How does it work?
Here is a simple summary of how a lifetime mortgage works:
- A lifetime mortgage is a loan secured on your property and is available to UK homeowners aged 55 and older
- You can access some of the equity tied up in your home tax-free, while continuing to live there
- Choose to take a one-off lump sum, or a smaller amount upfront with the facility to borrow more in the future
- The total you can borrow will depend on your age, your health and the value of your home
- You don’t have to make monthly repayments because the interest is added to the loan amount each year
- The loan plus interest is repaid when the property is sold — typically, when you die or leave your home permanently (e.g. you go into long-term care)
For details of how a home reversion plan works, read our article What is equity release?
Important things you should know
- Think carefully before borrowing against your home. You must always get professional advice from a specialist adviser, a lawyer or both
- The interest added to a lifetime mortgage can build up quickly and increase the amount you owe
- Releasing equity from your home will reduce the value of your estate and the amount you’re able to leave as an inheritance when you die
- Equity release may affect your tax position and your entitlement to state benefits
- The future market value of your home could be higher or lower than it is today
How it can help
Many people are living far longer than previous generations and have more time to make the most of their later years. But living longer can put a strain on your finances and your retirement pot may struggle to fund the way of life you’ve worked so hard for.
Releasing some of the equity in your home could make life a little easier every day and help finance your future plans. It could also provide a living inheritance for your family.
Here are just a few of the ways you could use the tax-free cash you unlock from your home.
A more comfortable retirement
- Clear outstanding debts
- Retire a little earlier than planned
- Top up your regular income
- Fund home improvements
Help the family
- Help children get on the property ladder or set up a business
- Pay education fees or living costs
- Finance a wedding or other family events
- Reduce the inheritance tax burden
- Adapt your home to your needs as you get older
- Fund care at home
- Pay funeral costs
- Pay medical or legal bills
- Take regular holidays or the holiday of a lifetime
- Finance a new car or caravan
- Fund leisure activities and hobbies
- Treat yourself to something you’ve always wanted
Are they safe?
All providers and advisers are regulated by the Financial Conduct Authority (FCA).
You can also check if your chosen provider or adviser is a member of the Equity Release Council (ERC), a trade body whose members agree to abide by a strict code of conduct, including:
- A no-negative equity guarantee — so you will never owe more than your house is worth
- The ability to transfer your scheme to another property without paying a penalty
Take it step by step
Releasing the equity in your home is a big decision. It’s important to consider all of your options before deciding whether this is the right way for you to finance your plans.
First, ask yourself:
- Do you have any savings and investments that you could use?
- Could you move to a smaller property? Remember to take moving costs, fees and stamp duty into account
- If you only need a relatively small amount of money, would an unsecured loan be easier? Or could you borrow it from a family member and repay them from your estate?
- If you still have a mortgage, is it possible to extend your mortgage term for a few more years? (This is likely to depend on your age)
- If you’re on a low income, have you checked what grants or benefits you may be entitled to?
You should always seek professional advice so you understand what’s involved and the fees you’ll need to pay. An experienced specialist adviser will be able to assess your personal situation and advise you on the best option for you.
For extra reassurance, you could get a specialist solicitor to explain your legal obligations.
It’s also important to include your family in the decision so they understand how it would work for you and affect them, particularly in relation to inheritance.
Straightforward answers to your questions
Eligibility can vary between provider and depends on the type of equity release scheme.
Typically, to be eligible for a lifetime mortgage you must be 55 or over and for a home reversion plan you must be 60 or over. You must be the homeowner and your property will need to be of standard construction and worth more than the minimum value required by your provider, usually around £70,000.
Yes you can. However, you will be required to pay off your outstanding mortgage using the cash you release from your home.
This will depend on your personal situation. Means-tested state benefits could be affected if you receive a cash lump sum as a result of releasing the equity in your home.
No, you don’t. The money you release from your home is tax-free.
If you decide to put some of this money into savings or investments, tax may be payable on any income or interest you earn.
Yes, if you have chosen a scheme provided by a member of the Equity Release Council, you can move home and transfer your scheme without penalty (subject to your lenders agreement) as long as your new home complies with the scheme provider’s criteria.
Not necessarily. Some schemes have a ‘drawdown’ facility that allows you to release money from your home as and when you need it or receive a regular income instead.
Yes you can, although releasing equity in your home will reduce the value of your estate.
With a lifetime mortgage, you usually have the option to preserve part of your home’s value to leave as an inheritance.
With a home reversion scheme, you can choose to sell only part of your home, leaving the rest as an inheritance.
No there isn’t. If you use a home reversion plan to release equity, you sell all or part of your property at the outset for a reduced price and owe nothing.
A lifetime mortgage is a loan secured on your home so the amount you owe will grow but, as long as your mortgage has a ‘no negative equity guarantee’, you will never owe more than your home is worth.
You will usually have to pay arrangement fees, legal fees and valuation fees. You will also have to pay for any legal and independent financial advice you receive.
With a lifetime mortgage, you may be able to have some of these costs added to the loan. With a home reversion scheme, you may be able to have some of the costs deducted from the amount of money to be released.