If you’re older, you may be thinking about equity release. It’s a way to access the equity, or the money, that’s tied up in your home without having to move. Equity release is a tricky subject and it can be hard to get your head around, so it’s important that you speak to a mortgage advisor or financial advisor to find out if it’s right for you.

But to help you decide on whether to get more advice, read our guide on equity release, including the pros and cons, the different types and our readers’ most frequently asked questions.

How does equity release work?

If you’re aged 55 or over, or over 50 in some circumstances, equity release allows you to take out tax-free cash to the value of your home. You can do this without having to pay off your existing mortgage, but you must repay it from the money you release. How much money you can release depends on how old you are and how much your home is worth.

To pay back the money you release, your home must be sold after you or the last remaining borrower dies or goes into long-term care.

You can release equity in one lump sum or take smaller amounts over a certain period, known as drawdown.

What are the two types of equity release?

There are two types of equity release: lifetime mortgages and home reversion plans:

Lifetime mortgages

Lifetime mortgages are the most popular form of equity release. If you’re 55+, they allow you to borrow money against the value of your home, releasing a tax-free percentage of equity in your property. You still remain the homeowner, but you will owe interest on the amount that you have borrowed.

You don’t have to make repayments with a lifetime mortgage, which means that it can last for the rest of your life. However, most lifetime mortgages do allow you to make repayments now to reduce the overall cost of the loan. Often these types of lifetime mortgages are available to homeowners over the age of 50.

Home reversion plans

Home reversion plans are offered to people over 60. They involve you selling a portion of your home at below market value to a lender, who pays you a tax-free lump sum. You can stay in your home without making any repayments, but as a tenant (if the lender owns the whole property) or part-owner (if the lender only owns a share of the property). When your property is sold, the money is split between the lender and your estate, based on the percentage you and the lender own.

You may want to consider what your plans are for leaving money to your family when you die. Releasing equity in this way is essentially a loan, meaning that it will need to be paid back, with interest, when the last remaining borrower dies or goes into long-term care. So if you want to leave money to beneficiaries, you’ll need to ensure that there is enough money to cover the lifetime mortgage first.

What happens when you release equity?

Three things generally happen when you release equity:

1. Get advice and check eligibility

You should seek advice from a qualified financial advisor before going ahead with equity release. They should check whether you are eligible for equity release and whether it’s the right financial product for you. They’ll then make a recommendation based on your circumstances and needs.

2. Valuation and offer

Your financial advisor will help you to submit your equity release application to the lender, who will then arrange to value your home. You should also appoint a solicitor that specialises in equity release at this stage. Once the lender has valued your property, they will send an offer and their terms and conditions to your solicitor.

3. Accept the offer and receive your money

If you’re happy with the offer the lender has made, you can accept the offer. The lender will then release your money to your solicitor, who will arrange to transfer the money to you as agreed – for example, as one lump sum or as a series of smaller payments.

The cost of equity release

Like a regular mortgage or remortgage, there are costs involved with taking equity release. You’ll need to pay solicitor and surveyor fees as well as fees to the lender for arranging the valuation and the lifetime mortgage or home reversion plan itself. Expect to spend at least £1,500, ranging up to £3,000.

Plus, lifetime mortgage interest rates are generally higher than the best rates on normal residential mortgages. At the time of writing in December 2023, the cheapest lifetime mortgages have an interest rate of around 6%, while others are closer to 8%.

It’s important to bear in mind that if you choose to take out a lifetime mortgage where you don’t have to make monthly repayments, the interest will keeping compounding. This will reduce the amount of equity you have left in your home, as well as reduce the amount of inheritance you can leave behind.

Pros and cons of equity release

Pros

• All the money you release is tax-free

• Stay in your own home

• No need to repay the loan until you die or move into long-term care

• You have the flexibility to make monthly payments or repay some of your loan early

• You can still move house after taking equity release if you wish

Cons

• You owe interest on the equity you release, and the interest is calculated daily – meaning if you don’t pay off any of the loan until you die or go into long-term care, you’ll reduce the equity left in your home

• If you gift some of the money you release to your family, they may have to pay Inheritance Tax on it later

• The inheritance you leave will be reduced

• You may not be entitled to some means-tested benefits

• If you pay back some or all of the money early, you may have to pay an early repayment charge

• If you have taken out a payment term lifetime mortgage, where you make monthly payments, you must keep up with them otherwise your home could be repossessed

Can you pay back equity release?

Yes, you can pay back equity release, although there is no requirement for you to do so in your lifetime. If you take out a lifetime mortgage, you can pay back some or all of it early. However, you will often have to pay an early repayment charge (ERC) which may mean it’s not worth paying it back.

Most payment term lifetime mortgages allow you to pay back a certain amount every year without having to pay an ERC. You should check the terms of your agreement to find out how much you’re able to pay back.

Is there a better alternative to equity release?

Whether there is a better alternative to equity release is down to your personal circumstances, wants and needs, but there are alternatives to equity realise that you can consider. The most common alternatives are remortgaging and downsizing, but there are a few other options that could help you live comfortably in your retirement too.

Downsizing

Another option besides equity release is downsizing. If you no longer need all the space in your home, for example if your children have left home or you’ve retired and don’t need an office space any more, you could consider selling your home and buying a smaller, cheaper property.

You’ll release equity from your former home, providing you with a cash lump sum and you may save money on household bills if the property is smaller.

It can be difficult to leave the family home, but it could be a good decision for your household. However, it’s important to remember that there are still costs involved, including stamp duty, conveyancing fees and surveyor’s fees. Plus, moving home is a time-consuming process and is a big lifestyle change.

Remortgaging

Remortgaging is another popular alternative to equity release. It works in a similar way to equity release, in that you borrow against the value of your home, but when you remortgage you must pay it back in your lifetime, instead of repaying it after you die or go into long-term care.

If you own your home outright, you can apply for a new mortgage so the lender gives you a cash sum that you agree to pay back over a certain term. If you already have a mortgage, you can apply to extend your mortgage term so you pay the outstanding loan back over a longer period, reducing your monthly payments, or you can apply to borrow more money.

However, if you are older, you might find it difficult to remortgage. Lenders have age limits, so you might struggle to find a lender if you are over 50. You’ll also need to prove that you can afford the monthly repayments, which you might find difficult if you are already finding yourself in need of cash.

Getting a lodger

Another option that people use as an alternative to equity release is getting a lodger. This way, you can stay in your home, but you’ll have an additional monthly income.

This of course only works if you have a spare room to let. You also need to make sure that your home is in a good state of repair and that you follow all the regulations surrounding being a landlord.

There will be some costs involved in getting a lodger. You may need to pay to advertise your room or get extra cover on your home insurance. You’ll also have to pay tax on any earnings over £7,500.

Budgeting

It’s sensible to look at your household budget before you make any major life decisions. Add up your total income and expenditure and see where you can make changes.

Make sure you take note of all your direct debits, debit and credit card payments and cash spending. See if you’re spending money on things you don’t need – for example, an unused gym membership or streaming service. Cut anything that you don’t use and you could find that you make significant savings.

It’s unlikely that if you’re thinking about equity release that budgeting will solve all of your financial worries, but small changes can add up and you may find that it helps you to live more comfortably.

Speak to a financial advisor to help you prepare for your retirement if you’re unsure of the best course of action.

Can you lose your house with equity release?

There are only specific circumstances where you risk losing your home with equity release. With a standard lifetime mortgage or home reversion plan, you don’t need to make any repayments, so you can’t lose your house when you’re not expected to pay the loan back in your lifetime.

However, when you die or go into long-term care, the loan will need to be repaid – and if the interest has compounded enough, it could wipe out the entire value of your home when your family or beneficiaries sell it. That means that there may not be any money left from the house to leave to them.

You can lose your home if you take out a payment term lifetime mortgage and don’t keep up with the repayments. Just like a normal mortgage, if you end up in arrears with your lender and don’t make arrangements for paying it back, as a last resort your home may be repossessed. If you are struggling to make repayments, whether on a lifetime mortgage or a standard mortgage, you should speak to your lender straight away and seek advice from a service such as Citizens Advice or National Debtline.

If you need help with deciding whether equity is right for you, use HaMuch. Our partner will put you in touch with a qualified mortgage or financial advisor who can help you decide whether it’s the right financial product for your circumstances.

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