How does equity release work?

According to recent figures, more than 26,000 homeowners took out a new equity release plan in 2023. If you’re considering your options and wondering ‘how does equity release work?‘, this guide will explain what it is, what you need to look out for, and what sort of costs are involved.

In this guide

1. What is equity release?
2. How does equity release work?
3. Equity release options
4. Is equity release a good idea?
5. How much does equity release cost?
6. Pros and cons of home equity release
7. Is equity release safe?
8. How much equity can I release?
9. Do you pay tax on equity release?
10. Can you get equity release on a leasehold property?
11. Can I sell my house if I have equity release?
12. How long does equity release take?
13. Can you pay back equity released from your property?
14. Can I get equity release if I have a mortgage?
15. Remortgaging vs equity release – which is best?
16. Alternatives to equity release
17. How long does it take to remortgage and release equity?
18. How does equity release work when you die or need to go into residential care?
19. Equity release key takeaways
20. Important questions to ask when considering equity release

What is equity release?

Equity release is the process of taking money out of your property without having to sell your home.

How does equity release work?

Designed for homeowners aged 55-plus, equity release options allow you to borrow money against the value of your home. It can be an attractive prospect because there is no requirement to make monthly repayments, unless you want to. Instead, the debt will be settled when the house is sold in the future.

Equity release options

There are several different equity release options. Some offer you a lump sum, some allow you to access a regular monthly ‘income’ from the equity in your property, and others offer the flexibility to access the equity as and when you need it.

Lifetime mortgage:

Lifetime mortgages are the most common type of equity release and in many ways a lifetime mortgage is very similar to a normal mortgage. You will still own your whole home and simply take out a loan against the value of the property. You will then have the choice whether you make monthly payments to cover the interest due on the loan or repay both the loan amount and all accrued interest when the property is sold.

Lifetime drawdown mortgage:

One type of lifetime mortgage that is very popular is a lifetime drawdown mortgage. Similar to other drawdown mortgages, you will retain ownership of your whole home. The difference between a lifetime drawdown mortgage and other types of lifetime mortgages is that a lifetime drawdown allows you to access the equity in your property as and when you need it.

The mortgage provider will agree an overall amount their are happy to lend you, based on your age, health and property value. After an initial lump sum amount, which will be agreed with your lender, the remaining loan amount will be kept in a cash reserve, ready for your to ‘draw down’ as and when you need it.

This type of equity release offers a lot of flexibility. You only get charged interest on the amount of money you have drawn down, so it can work out more cost effective than other types of lifetime mortgage, and you don’t have to pay additional arrangement or application fees when you need to access more money.

Home reversion:

With a home reversion product you will be required to sell a share of your property to the equity release company. You will have the right to remain in the property until you die, move into residential care or the property is sold, but at the point of sale the company will take what is owed to them. A home reversion product will usually allow you to choose between accessing lump sum and receiving smaller monthly payments.

Both a lifetime mortgage and a home reversion product can allow you to withhold a portion of the property value to leave as an inheritance, if you wish to do so.

Is equity release a good idea?

Whether or not releasing equity is the right choice will depend on your individual circumstances.

There are several benefits to equity release. If you own a property, it is likely to be your largest financial asset. Releasing equity allows you to access the cash tied up in your home without having to sell-up and move to a smaller property.

Equity release can also have a downside, however. Interest on the amount you borrow can accumulate very quickly, making it an expensive way to access your money. It can also limit your options, should your housing needs change in the future.

How much does equity release cost?

How much equity release costs will depend on how much you borrow, at what interest rate and how long for. This helpful illustration will give you an idea of how quickly your debt can escalate. For example, releasing £50,000 in equity over a 20-year period, with an interest rate of 7%, would leave you with a debt of just under £200,000.

Pros and cons of home equity release

There are several pros and cons to releasing equity from your home.

Pros:

• Enables you to use the money tied up in your home without having to downsize
• Relatively quick and easy to access a substantial amount of money

Cons:

• An expensive way to access your money
• Interest can accumulate very quickly
• Can make things complicated if your needs change and you need to move

Is equity release safe?

Lifetime mortgages and home reversion products are regulated by the Financial Conduct Authority (FCA). It is important to seek independent financial advice though, to ensure you find the right financial solution for your personal circumstances.

How much equity can I release?

How much equity you can release will depend on several factors, including your current age and the value of your property.

Do you pay tax on equity release?

No, any equity released from your property will be tax-free.

Can you get equity release on a leasehold property?

Most equity release companies will be happy to lend on a leasehold property, but they may have different criteria regarding the number of years remaining on the lease.

Can I sell my house if I have equity release?

Equity release products vary in the same way that normal mortgage products do, so it’s important to read the ‘fine print’ carefully if you’re considering releasing equity from your home. Some equity release products may be transferrable and allow you to take it with you to a new home, others will require debt to be settled upon sale of the property. This could impact your ability to move, so it’s important to consider this before releasing equity from your home.

How long does equity release take?

Most equity release applications will take 4-8 weeks from initial enquiry to money release.

Can you pay back equity released from your property?

Most equity release plans will offer an option to make voluntary repayments. This can help reduce the interest payable considerably, but you’ll need to check the details of the individual product you are interested in as there may be limits to how much you can repay each year and you may incur financial penalties.

Can I get equity release if I have a mortgage?

Releasing equity may be an option even if you have an outstanding mortgage. The amount you can borrow will depend on how much equity you have (the value of your property minus the outstanding mortgage and any other debts that are secured on the property), but as long as you meet the lenders criteria an existing mortgage is unlikely to be a problem.

Remortgaging vs equity release – which is best?

If you have an outstanding mortgage, you may want to consider remortgaging with additional borrowing rather than home equity release. Which option will be right for you is likely to depend on your monthly affordability, as additional borrowing on a traditional mortgage will result in higher monthly repayments.

The benefit of remortgaging rather than equity release is that interest rates are likely to be lower and therefore borrowing will be cheaper. Remortgaging is also likely to be a shorter-term financial commitment as you will be paying off your debt each month, however, your home will be at risk if you’re unable to keep up with your monthly repayments.

The benefit of equity release over remortgaging would be that you don’t have to make any monthly repayments if you choose not to. This will mean you have more disposable income each month.

Alternatives to equity release

If you like the idea of accessing the money tied up in your current property but aren’t sure about equity release, there are several alternatives.

• Downsizing – downsizing your property will leave you in complete control of your finances and is likely to be the cheapest solution overall. There will be no fees or interest to access your money (aside from the usual cost of moving house) and you’ll have the freedom to adapt your plans should your needs change in the future. There can also be many social and practical benefits to selling up and moving house as part of your retirement planning.
• Remortgaging – with most people now retiring later and options for longer mortgage terms, you may prefer to remortgage your home using a traditional mortgage product. This would give you more control over your borrowing in the longer-term and is likely to result in a far lower repayment amount.

How long does it take to remortgage and release equity?

If you’re applying for additional lending with your current mortgage provider, the application process should be very straightforward. You’ll need to provide some basic financial information such as recent bank statements and payslips (or proof of income), but you could have the funds in your bank account in as little as a week.

How does equity release work when you die or need to go into residential care?

Your equity release agreement will come to an end when you die, move into long term care or need to sell your home (unless your lender is happy to transfer your equity release product to your new property).

At the point your equity release agreement ends, your account will need to be settled and your debt repaid. Your property will be sold and the amount owed will be paid to the lender before any remaining profit is paid to you (or your estate if you have died). It’s important to ensure any equity release product you are considering has a ‘no negative equity’ guarantee. This will mean if the property sells for less than expected, any outstanding debt not covered by the sale proceeds will be written off, and you (or your estate) will not be liable for it.

Equity release key takeaways

There are several pros and cons to equity release and it’s important to explore all your options to find the right fit for your individual circumstances.

If you want to access the cash tied up in your home, there are several ways to do it. Downsizing to a smaller property, remortgaging your current home and equity release may all be worth considering. If you do decide to explore equity release, it’s important to research the different products available, as lifetime mortgages and home reversion plans will offer different benefits to homeowners.

Important questions to ask when considering equity release

• How much money do I want to access?
• Can I afford to make monthly repayments?
• What’s more important to me, more disposable income now or paying a smaller amount of interest?
• Is it important to me to leave an inheritance for my family?
• Does my current property meet my needs? Is it likely to continue to meet my needs as I get older?

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