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Can I Rent out My House with Equity Release? Property Laws

Renting Your House Equity Release

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Can I rent out my house if I have equity release on it? And can I have a tenant or lodger in my house? 

These are interesting questions for anyone considering taking out a lifetime mortgage or for anyone who already has one. You might be surprised by the answers. 

Read on to learn about equity release properties, renting, tenants, lodgers and your rights. 

What is equity release?

Many senior homeowners struggle to qualify for large loans and credit. But this doesn’t stop them from accessing some of their equity as a lump sum or drawdown facility. Older homeowners can use an equity release scheme to access over 50% of their home equity in some cases without ever having to make monthly repayments.

Equity release plans do not require the homeowner to make monthly repayments on the loan they receive because the debt is only paid back after death when the home must be sold from the estate to clear the debt – unless otherwise agreed by the lender and estate beneficiaries. The only time the home must be sold to repay the debt earlier is if the homeowner stops living there because they move into care. 

Equity release can fall into one of two categories. It can be done using a lifetime mortgage or a home reversion scheme. Both are explained in detail further down our guide. 

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What is the purpose of equity release?

The purpose of equity release is to give people nearing retirement or already in retirement a financial cushion to help fund everyday expenses, private care, holidays, home improvements or whatever they like. The money can even be given to family members as a gift. 

What’s the catch with equity release?

The catch with equity release is that it costs a lot of money over the long term. If you have a lifetime mortgage for over a decade, the amount you owe can easily double. Home reversion plans are no cheaper and can even be more expensive than lifetime mortgages in some cases. 

Although this is seen as a ‘catch’, the cost of your equity release scheme should never be a surprise. The exact costs should be fully explained to you before you agree to the plan. If it is not, you may have been mis-sold an equity release scheme and could even lodge a complaint to the Financial Ombudsman. 

Lifetime mortgage vs home reversion plan

The most popular method of equity release in the UK is by using a lifetime mortgage. These mortgages provide the senior homeowner with up to 60% home equity as a loan, which does not need to be paid back each month. The loan amount is subject to a fixed interest rate, but interest payments do not need to be paid either. 

The interest rolls up and grows bigger, making the total debt increase each month. Whatever is owed when it comes to selling the property and repaying the debt must be given to the lender, and anything left over will be the homeowner’s (if they moved into care) or estate beneficiaries (if the homeowner passed away). Some people make voluntary interest repayments to stop the debt from escalating and eating into beneficiaries’ inheritance. 

Home reversion plans are not as common but remain an option. They don’t charge interest but ask the homeowner to agree to give the lender a fixed percentage of the property’s eventual sale proceeds when the home is sold. This percentage is always much greater than the percentage of home equity taken out. 

For example, you might receive 20% of your home equity but have to give up 50% of the sale proceeds. The longer it takes to repay the debt the better this deal could be, but you also need to consider that the property could increase in value. 

How to qualify for equity release

We’ve mentioned that equity release is only available to senior homeowners, but how old do you need to be? And what are the other criteria to be eligible to apply?

Most equity release products require the youngest homeowner – in the case of joint owners – to be at least 55 years old. Some require the youngest homeowner to be 60 or even 65 to apply. The property should be owned outright or have a very small existing mortgage that you plan to pay off with some of the equity release proceeds. The property must meet a minimum valuation set by the lender. 

Can you do equity release on a rental property?

You cannot release equity on rental properties unless you plan to live in the property as your main residence. The same is true for UK holiday homes you might own. 

This is because equity release plans are only available on the properties you habitually reside at. You might need to have lived there for some time before becoming eligible to use equity release. If you stop living at the property you take equity out of with equity release, the lender will force you to sell the home and repay the debt. This is why the debt also becomes repayable before you die if you move into long-term care. 

Can you let a property with equity release?

For the same reason you cannot take out an equity release plan on a rental property, you cannot start renting out the property you have taken out an equity release plan on. 

To rent out the property, you would have to move out first, which would trigger the requirement to repay the debt and early repayment charges. The cost of doing this would be enormous and unaffordable to most people. 

If you stop living at the property and try to secretly rent it out without your lender knowing, you could end up in big trouble and in significant immediate debt. This situation should be avoided. 

Can I have a tenant with equity release?

Most equity release providers do not allow the homeowner to have a third party tenant living in the property. 

It’s important to understand the agreeable definition of a ‘tenant’. A tenant is usually someone who has exclusive access to rooms of the property where the homeowner is not allowed to go. 

For example, someone living in an annexe on the property with a locked door would be considered a tenant. This is highly unlikely to be allowed by the equity release provider. The reason for this is that a tenant has legal rights to (access) the property.

Can I have a lodger with equity release?

In most cases, equity release providers allow homeowners to have lodgers in the property after taking out an equity release plan. But they may implement a cap on the number of lodgers allowed.

A lodger is defined as someone who shares rooms and resources of the property with no exclusive access to any part of the property, and no legal rights to access it.

If a lodger is present or becomes present after equity release, the lender might ask them to sign a form to declare they will vacate the property if it needs to be sold while they are still living there. So, if the homeowner died, the lender could oust the lodger and sell the home to recover the debt with no issues or complaints. 

What are the advantages of equity release?

The primary benefits of using an equity release plan are:

  1. The money you receive is tax-free
  2. It can be spent however you like
  3. You can get a lump sum or drawdown
  4. You never have to make repayments
  5. You can volunteer repayments
  6. You continue to live at the property
  7. You don’t have to pay any rent

Advantages of using an Equity Release Council (ERC) member

The ERC is a membership group that creates rules and regulations that all members must stick to. These guidelines work in the interest of the homeowner, which makes financial advice companies and lenders that are members of the ERC more appealing than those that are not.

For example, one rule that lenders must abide by is the negative equity guarantee. This states that if the property sale does not cover all of the debt owed, the homeowner does not have to pay more than what the home sells for. The rest of the estate cannot be used to clear the shortfall on the debt. 

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Can you sell a house that has equity release?

Lifetime mortgages are designed to last your entire life, hence their name. So, if you just want to sell the property with an equity release plan attached, the costs of doing so can be eye-watering. Not only will you need to repay the debt, but you will trigger early repayment costs which can be huge. 

However, if you are selling the home to move to a new one, you might be able to take your equity release plan or lifetime mortgage with you. The ERC states that any homeowner must be allowed to move home to a suitable property and take the equity release plan with them. But what is classed as suitable?

‘Suitable’ means a property of equal or higher value, and one that can be just as easy to sell on the property market. For example, moving from a £150,000 flat to a £200,000 home in the suburbs. But moving from a £75,000 flat to a £65,000 boathouse might not be acceptable because it would be harder to sell a boathouse on the open market. 

But what about downsizing? Can you downsize to a lesser valuable property with equity release? The answer is yes – but there is a smart way to do it. Simply downsizing could mean having to pay early repayment charges on the amount you need to pay off to move to a less valuable home. But if you already have these plans, you can get a downsizing clause added to your equity release credit agreement so no early repayment charges are applied. 

Want more information about equity release and your homeowner rights? Find out more on our other free MoneyNerd guides. We have scores of articles on this subject! 

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