How Does Equity Release Work? Guide, Rules & FAQs

Are you wondering how equity release works? You’ve come to the right place for answers. Every month, more than 7,000 people visit this site for advice on this subject.

In this article, we’ll address the following questions:

• How to release equity from your home?
• How does equity release work?
• What’s the difference between Equity Release and Releasing Equity?
• How does equity release work when you die?
• How much will you repay with equity release?
• Can you take out equity release if you have an existing mortgage?

We know that understanding equity release can be a bit tricky. But don’t worry; you’re not alone. We’re here to help you make an informed decision.

Let’s dive in!

How to release equity from your home

Releasing equity from your home is when you access some of your equity as cash, often through borrowing. 

This can be done by taking out a secured loan against the property, such as a lifetime mortgage, the most popular form of equity release.

What is equity release?

Equity release schemes are a way of accessing some of your home’s equity when other loans might not be available to you. 

There are two types of equity release schemes: a lifetime mortgage or a home reversion plan. With a lifetime mortgage, the loan plus interest is usually repaid when the plan comes to an end. With home reversion plans, the homeowner may pay rent to the home reversion company.

Equity release schemes are attractive because they don’t require any monthly repayments. 

How does equity release work?

Equity release plans allow older homeowners to access some of their home equity as a cash lump sum. There is no need for the homeowner to move out and they would still own their home. 

However, the homeowner doesn’t make monthly payments to clear this debt. The debt is only repaid when they permanently leave their home, which is usually when the last surviving plan member moves into long-term care or dies.

A lifetime mortgage provider can instigate the sale of the property when the last remaining applicant moves into long-term care or passes away, and the property sale proceeds are used to clear the debt. Alternatively, family members can pay off the remainder of the loan.

Note: The equity release provider can also coerce the sale when T&C’s of the term have been breached.

With home reversion providers, they have to wait until the property has been sold to collect their share, but more on that below.

Read on to learn the differences between how lifetime mortgages and home reversion plans work. Or visit our dedicated pages on these two equity release plans via our main equity release hub. 

» TAKE ACTION NOW: Find out how much equity you could release

How do lifetime mortgages work?

A lifetime mortgage is a loan that is secured against your home, and it allows you to access some of your equity as cash. Interest is compounded and added to the overall loan. The loan nor the interest have to be paid back each month. The debt simply keeps growing as time passes

The total debt is repaid when the last remaining homeowner enters long-term care or passes away, and the property is sold. 

How do home reversion plans work?

Home reversion plans require the homeowner to sell a percentage of their home to the home reversion company. The reversion company will buy this percentage of the property for below its market value in return for a cash sum. However, the homeowner continues living in the property as normal. In some cases, rent may be payable to the reversion company. 

When the property is sold, the home reversion company gets their share of he proceeds of the sale. If you sold your entire property to them, they will receive the entire amount from the sale. 

What’s the difference between Equity Release and Releasing Equity?

Equity release and releasing equity are essentially the same thing, but I’ve gone into more detail below.

Equity release should only be used to refer to lifetime mortgages and home reversion plans. These schemes are exclusively used by people aged 55 or over. The people who use them usually don’t qualify for standard loans to access the equity in their home due to their age. 

On the other hand, releasing equity is an umbrella term to describe an array of products that could be used to access the equity in your home as a loan, such as home equity loans, home improvement loans and HELOCs. The minimum age to use these is usually 18. 

Another key difference is that equity release can only be used on your main residence. But releasing equity could be achieved on a second or BTL property as well! 

How does equity release work when you die?

A lifetime mortgage or home reversion plan must be repaid after the last surviving applicant dies or moves into long-term care. The property will be sold to repay the loan. 

Death is one of the common reasons why an equity release product must be repaid because you’ll no longer be the permanent resident of the property. 

Is equity release regulated?

Yes. Both lifetime mortgages and home reversion plans are regulated by the Financial Conduct Authority.  

Am I protected when using equity release?

You’re protected if you use a provider that is a member of the Equity Release Council. 

You have the right to remain in your property for life or until you need to move into long-term care. We will discuss the Equity Release Council in more detail later. 

One of the common equity release myths is that you can be kicked out of your home. 

What is the downside of equity release?

Although equity release plans allow you to take out a loan without having to make monthly repayments, the downside is that these plans can be expensive to repay in the end. 

This may not bother you if you only expect to repay after death, but it could be a concern if you have loved ones relying on a sizeable inheritance from you. Your property will be sold to pay off the outstanding balance, and any remaining inheritance will then go to beneficiaries. 

How much will you repay with equity release?

The amount you repay will depend on:

1. The interest rate
2. The size of the loan
3. How long passes between taking it out and the time you die or move into long-term care
4. And whether or not you decide to make monthly interest repayments while you are still alive and continue to live in your home

To understand how much you might have to pay back using a lifetime mortgage, we’ve created an example. 

If you took out one of these plans for £65,000 at a fixed compounded interest rate of 6.4%, the total amount needed to be repaid after just 12 years is close to £137,000.

Not understanding the true cost of equity release is one of the major equity release dangers. An equity release calculator can help you understand the projected long-term costs. 

But what about home reversion schemes?

The amount you have to repay with a home reversion plan will be a percentage of the sale proceeds equivalent to the share of your property the home reversion company bought. 

For example, if they purchased 25% of your £200,000 home for £25,000 (remember they buy for below the market value!), the company would be entitled to 25% of the sale proceeds. Assuming the property increased in value over time, they would get more than £50,000 from the sale depending on the level of property appreciation. 

How much can I borrow, and will I receive the money all at once?

The amount of money you can release from a lifetime mortgage depends on the value of your home and other factors, primarily your age. At best, you can take up to 55% of the value of your home with a lifetime mortgage.

There are ways to work out how much you could potentially get. You can do this by asking for an equity release quote from brokers and providers, or you could use an equity release calculator on a provider’s website if available. 

What are the best interest rates to expect with a Lifetime Mortgage?

Lifetime mortgage interest rates are subject to change, so it’s hard to give a definitive answer. The rated you’re offered will depend on different things, such as your loan-to-value ratio and any other features you have in your plan. The rate is usually fixed, but as it’s compounded interest with no repayments at all, the amount added to the debt each month keeps getting bigger, and is usually repaid when the plan comes to and end – via the sale of the property. 

The best lifetime mortgage rates are at the lower end of the range of rates offered, usually starting at 6.87%. If you secure a rate around this number, you will have one of the best rates on the current market – subject to change! 

Am I eligible for equity release, and does my home qualify?

The age criteria for a lifetime mortgage is at least aged 55 or over, whereas you need to be at least 65 years old or over to be eligible for a home reversion plan. Equity release schemes are usually used on your permanent residential home, but some lenders allow holiday/second homes. 

Equity release criteria regarding the property can differ between lenders, but in general, you need to own a property that meets a minimum valuation, usually around £70,000.

Can I take out equity release if I have an existing mortgage?

You will need to have paid off your existing mortgage to take out a lifetime mortgage or home reversion plan. Any other secured loans against the property will also need to be paid off first. You can use the funds released to clear your existing mortgage and any other secured loans.

However, there are some lenders that will allow you clear a small existing mortgage with part of the equity release money.

For example, you could take out a lifetime mortgage and some of the money will be sent directly to your mortgage lender to clear this debt. The remainder of the money will be sent to you.

How much equity do I have?

Your home equity is calculated by subtracting any debts secured against the property away from the property’s current value. 

For example, a £150,000 home with a £15,000 remaining mortgage would equate to 90% of £135,000. 

Can we take out equity release as a couple?

Yes, you can take out an equity release plan as a couple who both own the property. Both people will need to meet the age requirement at the time of the application.  

Can I taken out equity release if I’m drawing a pension?

You can take out equity release plan when you’re on a pension. After all, these plans are predominantly aimed at homeowners aged 55 or over. 

Taking out a conventional loan with monthly payments when on a pension income can be more difficult, which is why they turn to equity release plans. 

How can I use the money I get from equity release?

The money you receive from equity release can be used in a variety of ways. 

Some people use it as a way to improve their quality of life in retirement, possibly to cover ongoing expenses, go on multiple holidays or improve their property. You cannot use the money you receive from equity release to invest.

Others use it to pay off existing debts. 

Can I gift the equity in my property?

Yes, you can give the money you receive away to a loved one. But there could be inheritance tax implications, which are discussed here. 

Yes, you could gift the money to children or grandchildren. However, you need to be aware of any potential inheritance tax implications this could have.

It’s not uncommon for the homeowner to use equity release to help children buy their first home, or move up the property ladder. In this way, equity release works as a sort of earlier inheritance. 

But keep in mind that equity release overall will deplete your children’s inheritance. 

Can I release equity for school fees?

Yes, equity release could be used to help pay education costs, typically private school tuition fees. 

A drawdown lifetime mortgage plan might be best in this scenario as it would allow the homeowner to stage the receiving of their money in line with the school terms and deadlines to pay tuition costs. 

Can I use equity release to pay for care?

Equity release could be used to help pay for private at-home care to avoid having to go into a care home. 

Can I use equity release to pay off a mortgage?

You could use equity release plans to pay off a mortgage you have on a second property or help pay off a loved one’s mortgage. But you must have already cleared your mortgage to get equity release in the first place, although you can use the funds released through equity to do this.

The only exception would be if you have a mortgage and the equity release provider was allowing you to pay off your mortgage with some of the money you received, as discussed earlier in this guide. 

Can I still protect an inheritance with equity release?

Although one of the major disadvantages of equity release is that it reduces the value of your estate when you die, you can still ensure your loved ones don’t completely miss out.

To ensure more of an inheritance for them, you could:

1. Consider ring-fencing some of the property value within the agreement
2. Ensure that the provider is a member of the Equity Release Council meaning that there is a no negative equity guarantee, which means they will never request more than what the home sells for even if the lifetime mortgage debt exceeds this amount
3. Consider voluntarily paying off the interest added each month to reduce the amount owed later   

Is equity release safe?

Equity release is a safe method of borrowing, but you need to have a complete understanding of how it works and the consequences of using one on your and your estate beneficiaries’ future. 

The equity release industry was mostly considered a con. But in modern times, the industry’s reputation has improved. 

Moreover, it’s compulsory to receive equity release advice before using one of these schemes.

Where can I get advice about equity release?

Equity release advice is sometimes offered by equity release advisers who work in-house for equity release companies. 

Just because the financial adviser works for the provider, it doesn’t mean they should recommend an equity release plan or can pressure you into one. They must state when a plan isn’t right for you. 

You might prefer to receive advice from an independent equity release specialist who doesn’t work for a provider. Qualified equity release adviser services usually come at a cost. 

What is the Equity Release Council?

The Equity Release Council is an industry body of the equity release industry and also contributed to making equity release safer. The Equity Release Council represents the equity release sector and exists to promote high standards of conduct and practice in the provision of and advice on equity release which have consumer safeguards at its heart. They invite companies and specialists to become a member, which makes them more attractive to homeowners. 

However, as an Equity Release Council member, they must commit to a number of guarantees and assurances, such as the No-negative equity guarantee. 

This guarantees that you will never have to pay back more than what your home eventually sells for. This remains the case even if your lifetime mortgage debt exceeds the homes value. 

What different types of equity release are there?

A lifetime mortgage and home reversion plan are the only two types of plans. But there are some slight variations of equity release, particularly with lifetime mortgage plans, which often get considered as individual types, including:

• Enhanced equity plans
• Drawdown equity plans
• Interest-only equity plans

What are enhanced plans?

Enhanced plans allow you to borrow more or benefit from a lower interest rate if you have certain health or lifestyle conditions. The general idea is that poorer health results in a lesser life expectancy. 

Thus, the lender will offer you a lower interest rate or a larger lump sum, which could be used to improve your quality of life through private medical care – if desired. 

What is a Drawdown Plan?

A lump sum lifetime mortgage plan will provide the homeowner(s) with a single lump sum. But they might choose to receive a smaller amount of their money and then access the rest in stages at their request. This is known as a drawdown facility.  

There are benefits of using drawdown equity release, such as using a drawdown plan. And it could maintain your eligibility for means-tested benefits in comparison to receiving a larger lump sum. 

Consult an equity release drawdown calculator for a greater understanding! 

What is an interest-only plan?

An interest-only plan is when you pay back the interest applied to the lifetime mortgage each month. Thus, you make voluntary interest repayments.  

Using one is sometimes preferred to stop the debt from growing quickly, especially considering the interest is compounded. By stopping the debt from growing, you can ensure more of the sale proceeds from the eventual sale of the property is left to your loved ones. 

We’ve already taken a look at the best interest-only lifetime mortgage deals. 

Is equity release a good idea?

Equity release may be a good idea for some homeowners but it might not be the best solution for others. There are certain situations and individual preferences that make equity release a good idea.

Equity release advisers are charged with the task of working this out with you, which is why their involvement is so important. 

Equity release pros and cons

The pros and cons of equity release must be fully understood before you take out an equity release plan, which is why equity release advice is compulsory beforehand. So what are the main ones?

Benefits of equity release

There are a number of benefits to equity release plans. The main pros are:

1. You receive tax free cash
2. There are no compulsory monthly repayments to make
3. The money can be used to make retirement more enjoyable or clear existing debts hanging over you in later life.
4. You can continue to live in your home without paying rent!
5. Many providers commit to guarantees and assurances set down by the Equity Release Council
6. With a lifetime mortgage, you can choose to make interest payments to manage the size of your debt

Disadvantages of equity release

Similarly, there are disadvantages of equity release that you must be aware of, including:

1. Equity release plans can be expensive to repay in the end
2. Equity release will reduce the value of your estate and may affect your entitlement to means tested benefits.
3. Equity release includes various other fees and costs, such as an equity release solicitor. 

How do I set up equity release?

To arrange a lifetime mortgage or a home reversion plan, you need to speak with an equity release adviser first. 

Once your situation has been assessed, your adviser will find a suitable equity release company and independent legal advice to act on your behalf.

Which equity release companies are the best?

There is no best equity release company because everyone’s needs and preferences differ. 

The best equity release brokers will only look for the most suitable plans so you find the best equity release deals for your situation. 

How long does an equity release application take?

The average timescale for an equity release application to be approved is eight to twelve weeks to complete. 

There are situations that can extend the application process. The full process and all the steps have been illustrated in our How Long Does Equity Release Take? post. 

Which equity release companies should I avoid?

There are some equity release companies you might want to avoid. 

You can identify these yourself by searching for equity release company reviews. Or by checking if they’re a member of the Equity Release Council.

Equity release companies that are members of the Equity Release Council are typically more attractive because you’re guaranteed certain assurances, such as being able to remain in your own home. 

Can I change my equity release plan?

Yes. You are able to switch providers if you want to see if there’s another plan that offers you a better rate. You will need to speak to your financial advisor about this.

Can I move house if I have equity release?

Yes, you can move home with a lifetime mortgage, subject to criteria 

Being able to move isn’t usually common knowledge, and is considered one of the little-known truths of equity release. 

How much does equity release cost?

Equity release can be expensive to repay. This includes paying for services from advisers, brokers and solicitors. 

Where can I find the best equity release solicitor?

Finding the best equity release conveyancing services can give you peace of mind that the agreement will go through efficiently without issues. 

You can find different options online by searching for these services, or even better, use the Equity Release Council’s website to identify trusted solicitors. 

How does equity release affect benefits?

Receiving a large sum of money can affect your entitlement to receive some means-tested benefits. You could be considered too wealthy to receive some benefits, which could then have a knock-on effect on your entitlement to other financial support. 

We have provided a detailed explanation of how you could be affected – and tips on how to avoid this issue – in our How Equity Release Affects Benefits post. 

How does equity release affect tax?

Equity release is tax-free, so you won’t need to worry about paying any income tax or CGT on the money you receive. 

But gifting the money to someone else could have inheritance tax consequences. 

Any money you give away as a gift can be considered for inheritance tax if you die within seven years of giving the money away. But the money still falls within general inheritance tax rules, and tax may still not be owed if you’re estate is under the threshold. 

What are my options if I’m under 55?

You cannot use an equity release plan if you’re under 55. So what are your alternatives? 

You might wish to wait until you meet the age restriction, or you could consider taking out other forms of credit. 

Can you repay equity release early?

Yes, you can repay your equity release early with a lifetime mortgage but this might trigger an expensive early repayment charge. With a home reversion plan you would have to buy the property back at full market value.

Early repayment charges can sometimes be arranged so they decrease over time. Some plans will even decrease all the way down to 0% after 10 years of holding the plan. 

But by this time, even paying off a plan with no early repayment charge can still be expensive as the debt will have increased over time. 

Can I sell my house if I have an equity release plan?

You can sell your home if you have a lifetime mortgage plan. If you do so without transferring your equity release plan to a new property, you will have to repay the full debt with the sale proceeds. 

With a home reversion plan, you would need to buy the property back from the home reversion company for full market value before you can sell the property.

Can I rent out my house if I have an equity release?

You cannot rent out your home after you have released equity. But the good news is that having a lodger might not stop you from getting equity release, and you can always get a buy-to-let mortgage.

Can I use the equity in my house to buy another house?

No. Equity release funds cannot be used to buy an investment property.

Can I get equity release with an IVA?

Equity release might be a solution to end your IVA. To end an IVA, you sometimes need to take equity from your home and give it to your creditors.

Can you release equity on a buy-to-let mortgage?

You might be able to use equity release to release some of the money that is locked up in your buy-to-let properties if you currently own one or more of them, all without selling. So, your rental income keeps coming in, and you get a lump sum that you don’t have to pay taxes on.

When it comes to the proportion you can release from your property through equity release and buy-to-let, the laws are a little bit different. An equity release adviser can help you determine your options.

Can you take out equity release on a leasehold property?

You might be able to take out an equity release plan on a leasehold property. But the answer will depend on several factors, primarily the length of the remaining lease. 

You might need to extend the lease to be able to get an equity release plan, which can be costly. 

Can you take out equity release on a flat?

Yes, you can get equity release on a flat as long as it meets the equity release provider’s property criteria, including meeting the minimum valuation. 

If the flat is above commercial premises, such as a restaurant or shop, the lender may not consider your property to be acceptable. 

Can you take out equity release on a park home? 

No. Equity release plans aren’t possible on park homes for several reasons. The main ones are that park homes are susceptible to declines in value and the land it’s on is owned by the park home company. 

Can you take out equity release on a retirement flat?

It’s unlikely that you’ll get a lifetime mortgage or home reversion on an age restricted property, however some lenders might consider this, so it’s worth enquiring. We explain why in our Equity Release and Retirement Flats guide. 

Can I take out equity release on a rented property?

No, you must own your home to use an equity release scheme. 

If you want to ask if you can use equity release on a property you own and rent out, we have provided details here. 

In a nutshell, you would have to make that property your full-time residence to do so. 

What is the difference between equity release and a lifetime mortgage?

A lifetime mortgage is one of the two types of equity release. The other is a home reversion plan.

What are the rules on equity release outside of England?

The rules regarding equity release are comparable across the UK. But we have created Scotland Equity Release and Northern Ireland Equity Release pages for further information and tips to find local companies.

What is the Government Equity Release Scheme?

The Government Equity Release Scheme is a scheme designed to help first-time buyers get on the property ladder. It doesn’t relate to lifetime mortgages or home reversions. 

Can you get a second charge on a property with equity release?

No, you cannot take out a second charge loan with an existing equity release plan. 

Moreover, it can be difficult to get a secured loan against your home if you’re already over 55. 

Can equity release go wrong?

Equity release doesn’t always work out as expected, which has resulted in many equity release horror stories.

Equity release advisers should make sure that no equity release plans are mis-sold, so people don’t feel like they have made the wrong decision later. 

How else could I release the cash I need?

Releasing equity in retirement is rarely possible. Lifetime mortgages and home reversion schemes are usually the only solution. 

Is a bank loan better than equity release?

It depends on your personal circumstances, needs and preferences. This is why you must get personalised advice. 

Getting a bank loan secured against your home can be much more difficult in later life, and may not even be an option for you. 

Is remortgaging a better option than equity release?

Remortgaging to release equity is when you swap your mortgage for a new deal while simultaneously extending your borrowing against home equity. 

What are the alternatives to equity release?

If you’re considering equity release, you will have entered later life and probably don’t have many or any other borrowing options to consider. But there is one possible alternative for most homeowners – downsizing. 

By swapping your current home for a cheaper home, you could create a pool of cash to be used for your retirement or as you need.

Should I get equity release or downsize?

Only you can make this decision, but you should do so by looking at how these two options compare. We can help you do this by reading our Equity Release Vs Downsizing guide.