Equity release explained

Equity release is a way of accessing the cash tied up in your home without making monthly repayments - but is it right for you? Learn more about equity release or speak to one of our expert brokers.

What is equity release?

Equity release allows you to release money tied up in the value of your home tax-free without having to move out. It is generally only available to homeowners over 55, and you don’t need to have paid off your mortgage to do it.

Depending on the equity release product you choose, you won’t have to make any monthly repayments on the money you access. You can receive the cash as a one-off lump sum, a series of regular payments, or a combination. 

You can use the money you release in any way you like - some popular uses include:

  • Helping your children get on the property ladder

  • Paying off expensive loans and debts

  • Making home improvements

  • Supplementing your retirement income

  • Going on your dream holiday

What is the equity in a house?

In basic terms, your equity is how much of your home you own outright. 

You can easily work out how much equity you have in your home by taking away your outstanding mortgage balance from the current value of your property.

For example, if you have £150,000 left on your mortgage and your property is worth £400,000, you will have £250,000 of equity.

How does equity release work?

There are two main types of equity release you can use: lifetime mortgages and home reversion.

Lifetime mortgages are the most popular option for people looking to release equity from their homes. It works like a long-term loan secured against your home, which you won’t have to repay until you pass away or move into long-term care. 

You will be charged interest on the amount you release, but this can be rolled up with the balance and repaid when your home is sold. Alternatively, you can choose to pay off the interest accrued every month. 

How much you’re able to borrow using a lifetime mortgage will depend on things like:

  • Your age

  • The value and location of your property

  • Your health and lifestyle

Home reversion is a different option because you sell some or all of your home rather than borrow against its value. The home reversion provider then co-owns your home, but you retain the right to live there for the rest of your life.

Like a lifetime mortgage, you can receive the money as a lump sum or as regular payments. The home reversion provider usually pays between 20% and 60% of the market value of the part of your property you sell. You usually need to be 65 or older to use home reversion.

The loan is again only repaid when you pass away or move into long-term care and your home is sold. 

How much you get will depend on your age and health. Essentially, the longer the provider expects you to live, the lower their offer will be because it will be longer before they get their money back.

How much equity can I release?

How much money you can release from your property will depend on:

  • The current market value of your property

  • Your age

  • The size of your mortgage

  • The equity release product you choose

For example, the most you can usually release using a lifetime mortgage is 60% of the value of your home, but this is lower the younger you are. If you’re 55, this will likely be closer to 25%.

With home reversion, you can sell 100% of your home, but remember that the provider will offer below market value for your property, so you’re unlikely to get more than 60%.

Use an equity release calculator to determine how much you can access from your home.

Is equity release a good idea?

Equity release may seem like an easy and affordable way to achieve a comfortable retirement, but it isn’t without risks. 

It can also end up being a very expensive way to raise money, so explore all of your other options before opting for equity release. Here are a few alternatives to releasing equity:

  • Downsize your property

  • Use existing savings or investments first

  • Extend your mortgage term to reduce payments

  • Remortgage to release equity

  • Compare the cost of getting a loan to releasing equity

You should always speak to a professional advisor to discuss your equity release options. It’s also important to speak to your family about your plans, as it could affect them after you die or move into care.

Before deciding whether or not to go ahead with releasing equity from your property, consider the pros and cons.

  • The money you access is tax-free

  • You can stay in your home without downsizing or making extra payments

  • You don’t need to make any repayments until you pass away

  • Flexible options are available that let you make repayments if you want

  • No negative equity guarantees are available from most providers

  • You can protect a certain amount of equity for inheritance

  • You can sometimes move house and transfer your equity release product

  • It will reduce how much you can pass on to your loved ones when you die

  • Equity release Interest rates are high making it an expensive option

  • It can impact your entitlement to means-tested benefits

  • Early repayment charges may apply if you want to make repayments

  • You could get as little as 20% of the market value of your home with home reversion

  • Money gifted to family may be subject to inheritance tax in the future

How much does equity release cost?

Equity release can be a relatively expensive way to access money. There are several costs associated with releasing equity, and the biggest will be the interest you pay on what you borrow.

For lifetime mortgages, interest rates are usually higher than standard residential mortgages and can range from 6% to 8% or even higher. This can quickly add up, especially if you live for a long time after releasing equity. 

For example, if you release £50,000 from your property at 8%, after 20 years, you will owe more than £230,000. 

There are other initial fees you also need to consider, including:

  • Arrangement fees

  • Solicitors fees

  • Transfer fees

  • Valuation fees

These can all add up to around £2,000 or more, so make sure you factor them in when working out if equity release is the right option for you.

Our expert says...

Equity release is a popular way to boost your retirement income, but there’s a lot to consider before deciding to release equity from your house.

Always speak to a professional advisor to talk through all your options. Our experts can help you work out if equity release is right for you”

Jon Bone \ CeMAP-qualified

Equity release FAQs

Equity release products aren’t available to homeowners under 55, but there are other ways to access the money in your home.

You can do this by remortgaging to a new residential mortgage and borrowing more. This will provide you with a lump sum, but it will be affordability assessed, and you will need to repay it by the end of the mortgage term. Increasing the size of your mortgage will also mean your payments will almost certainly go up.

Alternatively, you can downsize by selling your property and buying a cheaper home. The difference in price will provide you with a lump sum you can use.

It is possible to repay your equity release, either fully or through partial payments. However, you may face early repayment charges, depending on your provider.

Similar to residential mortgages, many providers allow you to repay a certain amount each year, typically around 10% of the amount borrowed. Some products also allow you to repay the interest accrued each month, so only the initial loan amount will be repayable when you house is sold.

Leasehold properties can qualify for equity release, but it will depend on several factors. Equity release providers will need to know:

  • Your ground rent charges

  • Details of your lease agreement

  • The number of years left on your lease

Most lenders will only consider equity release on a leasehold if there is a long time left on the lease, typically at least 160 years minus the age of the youngest borrower. 

For example, if the youngest applicant is 65, there must be at least 95 years remaining on the lease. Some will also set an overall minimum length, usually at least 75 years.

If your lease is not long enough, you can look to extend it, but this will come with additional costs. Some lenders will agree to your equity release if you can prove you’ll be using some of the funds to extend your lease.

The money you receive from equity release is not liable for either income tax or capital gains tax. 

The money you receive is considered a loan and, therefore, cannot be considered a form of income. 

Capital gains tax (CGT) is charged on the profit when you sell an asset that has increased in value. Equity release doesn’t impact the value of your property, so it is exempt from any CGT liabilities.

Equity release may affect any means-tested benefits you’re currently receiving. These benefits are based on your income and capital, with capital referring to your assets, including your property, investments and savings. 

Although money received through equity release isn’t considered income, if you keep any of the cash in savings, it could take you over the capital threshold to receive the benefit.

Equity release for buy-to-let properties is possible; however, you won’t be able to use a lifetime mortgage or home reversion.

Some providers offer equity release on investment properties, but not many. Another way to access equity from your buy-to-let is to remortgage to a higher LTV loan or to sell your property and purchase a cheaper property.

Speak to a mortgage broker to discuss your options if you want to release equity from your buy-to-let property.

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