A Complete Guide to Equity Release

If you are a homeowner aged 55 or older and wish to access some of the cash tied up in your property, an equity release scheme might be a suitable option.

In this guide, you will learn how equity release schemes operate, how much you could unlock from your home, and explore other available alternatives.

How does equity release work?

An equity release scheme allows homeowners over the age of 55 to access the capital in their property without selling it. This tax-free cash can be used to supplement income in later life, fund events like holidays, or assist children with purchasing a home.

Monthly repayments are typically not required with equity release. The amount borrowed is repaid when the homeowner passes away or moves into long-term care, with the property sale covering the repayment. In joint policies, repayment occurs after the death of the last surviving policyholder.

There are two main types of equity release:

• Lifetime Mortgage: The most popular option, allowing you to borrow against your home’s value while retaining ownership. Interest accumulates over time, at either a fixed or capped variable rate.

• Home Reversion: In this arrangement, you sell a portion of your home to a provider in exchange for a lump sum or regular income, while maintaining the right to live there rent-free.

The key distinction between these two options is that with Home Reversion, there is no loan to repay, but you relinquish part of your ownership rights. Upon death or moving into care, the property is sold, and the sale proceeds are split according to the agreed percentage between the provider and your estate.

With a Lifetime Mortgage, you retain more flexibility. Many providers offer the option to make monthly repayments, which can help limit the amount of interest that builds up, allowing you to better manage your finances based on your needs.

Do you need to take professional advice?

Yes, whichever option you choose, seeking professional advice before making a decision is not only highly recommended but also a legal requirement.

How much equity can you release?

The amount you can release through equity release will depend on several key factors, including:

• Your age
• The value of your property
• The loan-to-value (LTV) ratio offered by the provider
• Your current health and lifestyle

You can use our calculator below to get a rough idea of how much equity you can release based on your age and property value.

Example calculations

The table below provides more illustrations of how much you may be able to borrow based on a specific age and property value. 

The above information is purely for illustration purposes only. 

Criteria for equity release

The typical criteria for qualifying for an equity release scheme are as follows:

• Age: Most providers require a minimum age of 55, though some may accept applicants as young as 50. Generally, the older you are, the more equity you can release.
• Property value: The amount you can release is based on a percentage of your property's current market value. Most providers set a minimum property value, often starting at £75,000.
• Property location: Your home must be located in the UK and usually owned on a freehold basis.
• Health and lifestyle: If you have certain health conditions or lifestyle factors, providers may offer enhanced terms, allowing you to release more equity.
• Outstanding mortgage: While it is possible to have a mortgage on the property, most providers prefer the outstanding amount and remaining term to be low.

Once these factors are assessed, providers will calculate the maximum loan-to-value (LTV) they are willing to offer based on the above criteria.

How interest is charged

It is essential to understand how interest is charged on equity release schemes before making any final decisions. In most cases, interest is added to the loan balance over time, compounding and increasing the total amount owed.

When it comes time to repay the loan, the initial amount borrowed, plus the accumulated interest, is calculated as the final sum. If you live for a significant period after releasing equity, the total to be repaid could be substantial in relation to the property’s value.

However, safeguards provided by the Equity Release Council (ERC), particularly the negative equity guarantee, ensure that the repayment amount will never exceed the value of your property.

Many equity release providers offer the option to make voluntary regular interest payments during your lifetime, which can help reduce the effect of compounding interest over time. This option may be worth considering if you have sufficient disposable income.

Interest is generally charged at either a fixed rate or a capped variable rate. Fixed rates provide certainty about how much interest will be charged, while capped variable rates allow for fluctuations within set limits.

Is equity release right for you?

To consider whether these types of schemes are suitable for you, it’s essential to weigh the pros and cons of equity release. They are summarised in the table below. 

Given all of the factors discussed, it is a legal requirement to seek professional advice before making a final decision on whether equity release is the right option for you. This ensures you fully understand the implications and have expert guidance throughout the process.

Frequently Asked Questions