What is equity release and how does it work?
Property is often the biggest asset most homeowners have. Property wealth is a bit like cash stuffed in a safe made of bricks. Handy to know it’s there. Less handy when you actually want to spend it, since the only way in is usually to sell up and move out. Equity release offers another option. It lets eligible homeowners access some of that value without packing a single box.
How does equity release work?
You borrow against your property’s value. You keep owning your home. You can usually take the money as a lump sum, in smaller withdrawals, or both. Unlike a normal mortgage, you don’t have to make monthly repayments. You can let the interest roll up instead, if you’d rather not think about it.
Why does the interest matter?
Rolled-up interest compounds. Think of a snowball rolling downhill. It just gets bigger. You pay interest on the original loan, and then on the interest already added to it. Over a long period, that outstanding balance can grow substantially. Some lifetime mortgages let you make voluntary interest or capital repayments. That can slow the snowball down.
When is the mortgage repaid?
When the property is sold. That’s usually after the last borrower dies or moves into long-term care permanently. Once the mortgage and interest are settled, whatever’s left belongs to the homeowner or their estate.
What is home reversion?
There’s a second, less common type of equity release called home reversion. Instead of borrowing against the property, you sell some or all of it to a provider. You get money in return, and you keep the right to live there under the plan’s terms. The catch: you can receive substantially less than market value for the share you sell. It’s worth reading that sentence twice.
What happens to your inheritance?
Equity release brings forward access to wealth that would otherwise stay locked in your property until you sell or die, whichever comes first (sorry, but someone has to say it). So releasing equity usually shrinks the estate you eventually leave behind. How much depends on the borrowing, the interest, property values, and how long the plan runs. Used carefully, it can even help with inheritance tax planning, by reducing the overall size of the estate.
What protections are available?
Most lifetime mortgages that meet Equity Release Council standards come with a no-negative-equity guarantee. Reassuring, if slightly odd that it needs spelling out. In plain terms, subject to the usual conditions, you’ll never owe more than your home eventually sells for. That guarantee doesn’t make equity release right for everyone, though. Get financial advice. This isn’t a decision to make after three glasses of wine and a property programme. Typically available to over 55’s, the older you are, the more you can borrow.
What else should you consider?
Equity release can affect your inheritance tax position and your entitlement to certain means-tested benefits. Budget for advice, arrangement fees, valuation and legal costs too, since none of it is free. Downsizing, using existing savings or investments, or a different later-life mortgage might suit you better. Worth ruling them out before you rule equity release in.
Equity release is a long-term commitment, not just a quick way to get at cash. It deserves specialist advice and a proper look at the wider financial picture before you go anywhere near the paperwork. T preventy surprises, it should also be a family discussion especially if there are beneficiaries to your estate. Our guide on how to release equity from your house walks through the practical steps, MoneyHelper’s impartial guide is a good independent second opinion, and our equity release advisers are happy to talk it through whenever you’re ready.