Equity Release Rules – What You Need To Know

This guide explains the main equity-release rules and the product-specific conditions you should check with an adviser.

But don’t worry, we’re here to help! In this article, we’ll explore:

• What equity release is and how it works in the UK
• The rules and eligibility for equity release
• The role of the Equity Release Council (ERC)
• How much equity you can release and how to get a realistic quote
• The benefits and potential pitfalls of equity release

Did you know? The Centre for Ageing Better’s study reveals that a million homes in the UK need changes to be better fit for living comfortably, and a third of these homes have someone over 55.¹ This highlights the importance of considering equity release for those seeking improvements.

Eligibility and suitability depend on your age, property, finances and the product. This guide explains the main checks.

Let’s dive in.

How does it work in the UK?

There are two main types of equity release products in the UK, namely a home reversion scheme or a lifetime mortgage.

There are some slight variations of lifetime mortgages, such as an enhanced lifetime mortgage for people to access more money if they have a shorter life expectancy. 

A Comparison

To make the right choice, it’s crucial to understand the main differences between a home reversion plan and a lifetime mortgage. That’s why I’ve put together this table that outlines essential considerations.

Category	Home reversion plan	Lifetime mortgage
Ownership	You sell part or all of the home, usually for less than open-market value, and remain under the plan’s occupancy terms.	You retain ownership and borrow against the home.
Property value changes	The provider receives the agreed share of future sale proceeds; only any retained share belongs to your estate.	Sale value and the outstanding loan, interest and charges affect the amount left for your estate.
Inheritance	Selling a share reduces what you can leave; any protected share and conditions must be checked.	Rolled-up interest can reduce the remaining equity. Inheritance protection may be available under some plans.
Repayment	There is no loan to repay for the sold share; the provider receives its share when the property is sold under the plan.	Usually settled when the last borrower dies or moves permanently into care. Payment options and obligations vary.
Money received	A lump sum or income may be available, depending on the plan.	A lump sum or agreed drawdown reserve may be available; access remains subject to the plan terms.

Our financial expert, Janine Marsh, says, ‘ A lifetime mortgage is definitely the most popular of the two options, especially considering the second option isn’t technically a loan (you won’t need to pay interest on it). Both types of equity release should be considered carefully as there is risk involved.’

What are the rules? (eligibility) 

Eligibility depends on the product, age, property, credit circumstances and any required affordability assessment. Minimum property values and borrowing limits are lender-specific. An existing mortgage normally has to be cleared at completion, often using some of the released funds.

An existing mortgage can often be cleared from the released funds at completion, if the available funds and any other resources are sufficient.

Most standard lifetime mortgages start at age 55, but some payment-term lifetime mortgages are available from 50 and require interest payments for an agreed period. Home-reversion minimum ages and all other eligibility rules depend on the provider. Check the youngest applicant’s age and the actual product criteria. See related guidance.

Do both parties have to be over 55?

When the minimum age requirement is set at 55 years old then this applies to both homeowners. If your equity release adviser suggests taking someone who is too young to qualify for equity release off the property ownership – be extremely cautious.

This can be really bad advice and open any younger surviving partner up to losing their home in later life. 

Rules with the ERC

The equity release rules and guidelines created by the council have all been made to keep homeowners protected and provide them with greater reassurances when taking out a lifetime mortgage or other equity release product. 

Check the particular product against the relevant Equity Release Council standards and ask the adviser to identify any differences. Key safeguards include:

1. For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.

2. Moving home: the new property must meet the provider’s criteria. A cheaper home may be acceptable, but partial repayment or charges can apply.

3. Right to remain: this depends on the property remaining your main residence and on meeting the contract’s conditions, which can include payments, insurance and maintenance.

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What are the rules on spending the money?

Funds can be used for various purposes, subject to provider terms. An adviser should assess the intended use and alternatives, especially investment, gifts and debt repayment.

Some homeowners decide to invest the money in a new property, such as a rental investment or holiday home. If you decide to buy a holiday home, there can be some complications and things to note. 

Lifetime mortgage debts can be recovered if the homeowner is no longer living at the property, hence why it becomes due if you move into a residential care home.

If you buy a second home and live in it for too long each year, you could be judged to have changed your residential address and therefore owe the money back immediately. The specifics of these rules will be determined by your lifetime mortgage provider. 

How much can you take out?

The amount of home equity you can release will depend on the lender’s maximum loan-to-value ratio, your age and factors related to your property. There could be a minimum loan amount you have to take out, subject to the lender’s own equity release rules. 

There is no universal maximum percentage. The amount available depends on the product, age, property value, health where considered and lender criteria.

If you have a shorter life expectancy than expected, possibly because you have been diagnosed with a terminal illness, you might be able to access more home equity than standard.

Enhanced underwriting may involve health questions and supporting information. Any medical evidence or examination requirements depend on the provider.

Getting access to more money during this time could be used to fund private care and treatment or to tick off the things you want to see and do before you die. 

Property value affects the amount initially available. A lifetime-mortgage balance grows through interest and fees less repayments; it does not automatically rise or fall with property prices.

The location of your property may affect your ability to lend

Availability differs across UK nations and individual locations. Not every plan is available throughout England, Wales and Scotland; confirm the actual property postcode with the provider.

Not only that, lenders also look at where your property is, and what might affect its resale value, for example, if you live near a noisy railway.

Do you have to get financial advice first?

Use an appropriately authorised and qualified equity-release adviser. Ask about the products they consider, fees and commercial ties.

How about independent legal advice?

Independent legal advice is separate from regulated financial advice. Your own solicitor or other eligible legal professional checks the legal terms and acts for you; check the lender’s requirements.

Can you do it with bad credit history?

Many lifetime mortgages allow interest to roll up without regular payments, but some require interest payments for a set period. Optional repayments, limits and any early-repayment charges depend on the contract. Lenders also apply credit and eligibility checks.

Poor credit does not automatically rule out every lifetime mortgage, but lenders set credit criteria and may require some debts to be repaid. An IVA, bankruptcy, judgment or other credit issue can restrict eligibility; acceptance is not guaranteed. See related guidance.

Can you be rejected?

You can be rejected for equity release if you have CCJs on your credit file, but there are more common reasons why people get rejected for a lifetime mortgage. 

Property issues can lead to rejection, depending on the lender. Possible concerns include:

1. The presence of asbestos
2. Non-standard construction, possibly not built to regulations
3. Single skin constructions
4. Proximity to a commercial property
5. High flood risks

The benefits of taking out a plan

Here are some of the reasons why seniors still consider taking out an equity release plan:

1. The money can be given as a lump sum or drawdown
2. Funds may be used for different purposes, subject to provider rules and advice on tax, benefits and affordability.
3. Many lifetime mortgages allow interest to roll up without regular payments, but some require interest payments for a set period. Optional repayments, limits and any early-repayment charges depend on the contract.
4. For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.
5. As illustrated earlier, the ERC provides a tonne of additional benefits and assurances. 

What are the pitfalls?

Before rushing into an equity release agreement, it’s essential that readers are aware of some potential pitfalls, such as:

1. Releasing too much equity – releasing too much can significantly increase your total debt and can be avoided. If you are not sure how much you need to borrow for your purpose, consider a drawdown facility instead to avoid unnecessary over-borrowing. 
2. Disclose all information with financial advisers – make sure to tell everything to your adviser so they source the best equity release loan for your circumstances. For example, downsizing in the future can mean paying back some of your loan and incurring early repayment charges. But knowing this in advance could mean getting an agreement that doesn’t incur costly fees when you downsize. 
3. Check the product’s safeguards, terms and provider authorisation. Council membership is not a guarantee that every product or personal outcome is suitable.

Is it the right option for you?

Equity release is more than a financial decision, it is a personal decision that considers your estate and who will inherit your wealth and assets. Speaking with an independent financial adviser is the best and only way of knowing if it is the right decision for you. They will not tell you what to do, but they will give you the facts so you can make an informed decision. 

Does it get taxed?

A lifetime-mortgage advance is borrowed capital rather than taxable income. A home reversion is a sale of property rights. Later income, investments, gifts and unusual property circumstances can have separate tax consequences.

An eligible estate may qualify for a residence nil-rate band of up to £175,000, subject to conditions and tapering. Equity release does not automatically remove the whole allowance; the estate and inherited property must be assessed.

Many outright gifts to individuals can fall outside inheritance tax after 7 years, but exemptions, trusts and gifts with reservation have different rules. Obtain tax advice before gifting released money.

Does the scheme affect your state pension?

The State Pension is not means-tested, and people can receive different amounts based on their National Insurance record and pension rules. Released capital may affect means-tested support such as Pension Credit.

Equity release does not affect eligibility to receive a state pension because it is not a means-tested benefit. Only means-tested benefits can be affected if your cash wealth increases, i.e. if you now have a lot of savings you may not be allowed to receive state support.

For Pension Credit, savings above £10,000 generally produce assumed weekly income of £1 for each £500 or part of £500. The resulting entitlement depends on the full assessment.

Having too much saved can wipe out any eligibility to receive pension credits. This is significant because, without eligibility for pension credits, you can more easily lose eligibility to others, such as a council tax reduction. 

An alternative option

Downsizing may release cash without an equity-release product and may preserve more property ownership. It does not guarantee the size of a future inheritance; debts, spending, care costs and tax still matter.

The answer is to downsize. 

By selling your home and moving into a less valuable home, you could create a financial pot and then still own 100% of a property that could be passed on, and it may have increased in value further when it is passed on. 

Some negatives of doing this are the stress and costs involved when moving house, especially in older age. Or you and the rest of the family may have a sentimental attachment to your current home and not want to sell. 

References

1. Legal & General – Equity Release