What is Equity Release and How Does it Work?

January 25, 2024
Equity Release

What Is Equity Release? A home can hold substantial value without providing spendable income.

Equity release is one way eligible homeowners can access part of that value while continuing to live in their property. It is usually considered later in life and involves a long-term financial commitment.

The decision is not simply about how much money can be released. It is also about what remains afterwards: future housing choices, benefits, care plans, borrowing costs, and the estate left to others.

What is equity release?

Equity release allows an eligible homeowner to access money held in their property without selling and moving immediately.

The two recognised forms are:

A lifetime mortgage, which is a loan secured against the home.
A home reversion plan, which involves selling part or all of the property to a provider.

Lifetime mortgages are far more common. Interest is normally charged on the amount borrowed and may build over time.

The plan is usually repaid when the last borrower dies or moves permanently into long-term care. The property is then normally sold.

Equity release can affect:

The value of your estate.
Means-tested benefits.
Future care funding.
Your ability to move home.
The choices available later in life.

It is a regulated and complex area. A qualified adviser should examine your objectives, alternatives, property, finances, and future plans before making any recommendation.

Find an equity release adviser through Connect Experts.

What does equity mean in a property?

Property equity is the difference between the current market value of a home and any borrowing secured against it.

For example:

Estimated property value: £400,000
Existing mortgage: £50,000
Estimated equity: £350,000

This does not mean the whole £350,000 can be released.

The available amount depends on the provider’s criteria. These may include the youngest applicant’s age, the property, its condition, location, health information, and the chosen product.

Any existing mortgage secured on the property will usually need to be repaid when the equity release plan begins. Part of the released money may therefore be used for that purpose.

How does equity release work?

The process usually follows several stages.

1. Your circumstances are reviewed

An adviser should establish why you want the money and whether borrowing against your home is suitable.

This review may include:

Current income and expenditure.
Existing mortgages and debts.
The amount required.
Planned use of the money.
State benefits.
Health and care considerations.
Family and inheritance objectives.
Possible future house moves.
Other property or financial assets.

2. Alternatives are considered

A recommendation should not begin with a product. It should begin with the financial need.

Possible alternatives may include downsizing, using savings, claiming available benefits, taking conventional borrowing, or choosing a retirement interest-only mortgage.

3. The property is assessed

The provider will assess whether the property meets its lending criteria. A valuation will normally be arranged.

Property type, condition, construction, tenure, location, and value can affect eligibility.

4. A solicitor provides legal advice

Equity release requires legal work. Your solicitor should explain the legal commitment independently from the mortgage advice.

5. The plan completes

The money may be provided as:

One lump sum.
An initial lump sum with a drawdown facility.
A combination of both.

The selected structure affects how and when interest is charged.

What is a lifetime mortgage?

A lifetime mortgage is a loan secured against your home.

You remain the owner of the property, subject to the terms of the mortgage. The loan does not usually require full monthly capital repayments.

Depending on the product, you may be able to:

Make no regular payments.
Pay some or all of the monthly interest.
Make voluntary capital repayments.
Take an initial amount and reserve more for later.

Where interest is not paid, it is normally added to the mortgage balance. Future interest is then charged on the increased balance.

This is known as compound interest.

How compound interest affects the balance

Compound interest means the debt can grow faster over time.

For illustration only, suppose £50,000 is borrowed at a fixed rate of 6% and no payments are made.

The approximate balance would be:

After one year: £53,000
After five years: £66,911
After ten years: £89,542
After fifteen years: £119,828

This simplified example assumes the rate remains unchanged and no fees are added.

It does not represent a quotation or prediction. An adviser should provide a personalised illustration showing the possible future balance.

The lesson is practical rather than dramatic: time is a central cost of equity release.

What is a drawdown lifetime mortgage?

A drawdown plan provides an initial amount and a reserve facility for future withdrawals.

Interest is generally charged only after money is withdrawn. This can reduce total interest compared with taking the full amount immediately.

However:

Future withdrawals are not always guaranteed.
The provider may impose minimum withdrawal amounts.
The original product terms will determine the applicable rate.
Taking money later may affect benefits at that time.

Drawdown can offer flexibility, but unused borrowing should not be mistaken for accessible savings.

What is a home reversion plan?

A home reversion plan is different from a mortgage.

You sell part or all of your home to a reversion provider. In return, you receive a lump sum or regular payments and retain the right to live in the property under the plan’s conditions.

The amount paid is normally below the full market value of the share sold. This reflects the provider’s need to wait until the property can be sold.

Home reversion plans are less common than lifetime mortgages. They also change the proportion of the property that you own.

Independent legal and regulated financial advice is important before considering this option.

Do you still own your home with equity release?

With a lifetime mortgage, you retain ownership of the home.

The provider holds a legal charge over the property, as a conventional mortgage lender would. You must follow the conditions of the agreement.

These may include:

Maintaining the property.
Keeping suitable buildings insurance.
Using the property as your main residence.
Telling the provider before certain occupants move in.
Obtaining permission for major changes.
Informing the provider about extended absences.

With a home reversion plan, you no longer own the share sold to the provider.

Can you remain in the property for life?

Plans meeting Equity Release Council product standards generally include the right to remain in the property for life or until permanent entry into long-term care.

This right remains subject to the plan’s terms.

For joint plans, repayment is generally triggered after the last remaining borrower dies or moves permanently into care.

Borrowers should still check the actual product documents. A general industry standard cannot replace the terms of a specific contract.

What is a no-negative-equity guarantee?

A no-negative-equity guarantee is designed to prevent the estate from owing more than the property’s eventual sale proceeds.

When the property is sold, the borrower or estate should not have to pay any remaining shortfall, provided the plan’s conditions have been met.

This safeguard does not preserve an inheritance.

It limits liability if the mortgage balance grows beyond the property’s eventual sale value.

Is money from equity release tax-free?

Money borrowed through a lifetime mortgage is not normally treated as taxable income.

However, the way the money is held or invested can create separate tax consequences.

For example, interest or investment returns produced after the money is released may be taxable. Gifts can also have estate-planning implications.

Tax treatment depends on individual circumstances and may change. Seek specialist tax advice where required.

What can equity release be used for?

Released money can generally be used for many lawful purposes.

Common examples include:

Repaying an existing mortgage.
Adapting or repairing the home.
Supporting retirement expenditure.
Helping family members.
Buying a more suitable property.
Funding private care.
Consolidating certain debts.
Creating an emergency reserve.

The purpose matters because it affects suitability.

Borrowing for a necessary roof repair presents a different decision from borrowing for short-term discretionary spending. The same product can therefore produce very different long-term outcomes.

Who may qualify for equity release?

Eligibility varies between providers.

Factors may include:

The age of the youngest applicant.
Property value.
Property location.
Construction type.
Property condition.
Whether the home is freehold or leasehold.
Any existing secured borrowing.
The amount requested.
Medical or lifestyle information.

Lifetime mortgages commonly begin from age 55. However, minimum ages and property requirements differ.

Some health conditions may support a higher release through an enhanced lifetime mortgage. This should be assessed carefully and supported by accurate information.

Eligibility does not establish suitability. A person can meet a provider’s criteria without the product being right for their needs.

How much equity can be released?

The maximum amount is usually expressed as a percentage of the property’s value.

The percentage often rises with the youngest applicant’s age. Health information may also affect the available amount under some plans.

A provider may decline the property or reduce the available borrowing because of:

Unusual construction.
A short lease.
Poor condition.
Commercial activity nearby.
Flood or subsidence concerns.
Restrictive occupancy arrangements.
A large amount of land.
Certain planning restrictions.

Online calculators can provide an indication. They cannot confirm acceptance or suitability.

What are the possible benefits?

Equity release may provide:

Access to property wealth without an immediate move.
No compulsory monthly payments on some plans.
Fixed or capped borrowing rates on qualifying products.
Drawdown facilities for staged access.
Voluntary repayment options on some plans.
The ability to remain in the home under the product terms.
Protection through a no-negative-equity guarantee on qualifying plans.

These features should be judged against the full cost and effect of the plan.

A useful feature is not automatically a suitable outcome.

What are the disadvantages and risks?

Interest can build for many years

Where interest is not paid, compounding can substantially increase the amount owed.

Your estate will usually be smaller

The loan, interest, and relevant charges are normally repaid from the property sale.

Means-tested benefits may be affected

Receiving or retaining released money can alter entitlement to certain benefits or local authority support.

Early repayment charges may apply

Repaying the plan early can result in a charge. The method and duration vary between products.

Moving may be more difficult

Some plans can be transferred to a suitable new property. However, the new home must meet the provider’s criteria.

A move to a lower-value property may require partial repayment.

Future borrowing may be restricted

The existing lifetime mortgage may limit further secured borrowing.

Care plans may change

Using housing wealth now can reduce the funds available for future care, housing, or family support.

Family expectations may be affected

The eventual inheritance may be lower than expected. Discussing the proposal with family can be useful, although the decision remains yours.

Property conditions continue to apply

You remain responsible for maintenance, insurance, and compliance with the plan.

For impartial background information, read MoneyHelper’s guide to what equity release is and how it works.

What are the alternatives to equity release?

A suitable review should consider realistic alternatives rather than mentioning them only briefly.

Downsizing

Selling and purchasing a cheaper property may free up money without incurring long-term mortgage interest.

Moving costs, availability, emotional ties, and future housing needs must still be considered.

Retirement interest-only mortgage

A retirement interest-only mortgage usually requires monthly interest payments.

The capital is commonly repaid after the property is sold, the borrower dies, or the borrower enters long-term care.

Affordability must normally be demonstrated.

A conventional mortgage or remortgage

Some older borrowers may qualify for a standard mortgage, depending on income, age, term, and lender criteria.

Using savings or investments

Using existing resources could avoid mortgage interest. However, it may reduce accessible reserves or create tax consequences.

Benefits and grants

Checking unclaimed benefits, local authority support, or home improvement grants may reduce the amount required.

Family assistance

Support from family may be possible, but the arrangement should be documented clearly. Independent legal or tax advice may be needed.

Delaying expenditure

Some spending can be postponed or funded gradually rather than through immediate long-term borrowing.

Selling another asset

Other property, investments, vehicles, or valuable assets may provide a more suitable source of funds.

An adviser should compare credible alternatives using evidence, not assumptions.

Can equity release be repaid early?

A lifetime mortgage can usually be repaid, but early repayment charges may apply.

Some products allow limited repayments each year without a charge. Others provide exemptions for defined circumstances.

Possible exemptions may relate to:

Repayment after a joint borrower dies.
Repayment after a joint borrower enters long-term care.
Moving home where the new property is unsuitable.
Specific fixed-charge periods.

Terms differ considerably. Check the personalised illustration and mortgage offer before proceeding.

Can you move home after taking equity release?

Many lifetime mortgages are portable.

Portability means the plan may be transferred to another acceptable property. It does not mean every property will qualify.

The provider may assess:

Value.
Construction.
Condition.
Location.
Tenure.
Flood risk.
Remaining lease term.
Resale prospects.

If the new home is worth less, part of the mortgage may need to be repaid.

Anyone expecting to move should discuss likely property types with an adviser before choosing a plan.

What happens when the borrower dies?

For a single plan, the mortgage normally becomes repayable after the borrower dies.

For a joint plan, it usually becomes repayable upon the last borrower’s death or entry into permanent long-term care.

The estate is generally given time to arrange the sale of the property. Interest can continue during this period.

The executor should contact the provider promptly and check the repayment timetable.

After the property is sold:

Sale costs are paid.
The lifetime mortgage is repaid.
Any remaining value belongs to the estate.

How do you find an equity release adviser?

Equity release advice should examine much more than an available interest rate.

A suitable adviser should discuss:

Why the money is needed.
The amount required.
Income and expenditure.
Existing debts.
State benefits.
Health and care expectations.
Property plans.
Family circumstances.
Inheritance objectives.
Tax considerations requiring specialist advice.
Downsizing and other alternatives.
Product costs and early repayment charges.

The adviser should explain why any recommendation fits your circumstances. They should also explain why reasonable alternatives were not selected.

Finding an adviser through Connect Experts

Connect Experts is a directory and matching platform. It does not provide the equity release recommendation itself.

The directory lets you review advisers who may be able to discuss later-life lending. Profiles can help you compare information such as:

Location.
Areas of mortgage expertise.
Languages spoken.
Contact options.
Adviser and firm details.

Before choosing an adviser, confirm:

They hold the required equity release permissions.
Their firm appears on the FCA Financial Services Register.
Their advice fee.
Other likely costs.
Which providers and products they can consider.
Whether they advise on home reversion plans.
Whether they hold relevant later-life lending qualifications.
Whether they or their firm belong to the Equity Release Council.

Use the FCA Firm Checker to check whether a firm is authorised and has permission for the relevant service.

Search the Connect Experts directory for an equity release adviser.

Questions to ask at the first meeting

Consider asking:

What alternatives have you considered?
How would the debt change over time?
Can I pay interest or capital voluntarily?
What early repayment charges apply?
Can the plan move with me?
What happens if my partner dies or enters care?
Could my benefits be affected?
What happens if I give the money to family?
What are the advice, legal, valuation, and product fees?
Which circumstances could breach the mortgage conditions?
How much of my property value may remain?
What assumptions does the illustration use?

A good recommendation should withstand careful questions.

Frequently asked questions

Is equity release the same as a lifetime mortgage?

Not exactly.

A lifetime mortgage is the most common form of equity release. Home reversion is the other recognised form.

Do I have to make monthly payments?

Not necessarily.

Many lifetime mortgages allow the interest to be added to the balance. Some plans allow or require interest or capital payments.

Can I lose my home?

You must comply with the mortgage conditions.

Qualifying plans may allow you to remain in the property for life or until permanent entry into care. However, you remain responsible for insurance, maintenance, and other contractual duties.

Will equity release affect my benefits?

It can.

Means-tested benefits may be affected by the amount released, how it is held, and how quickly it is spent.

A benefits check should be completed before proceeding.

Can equity release clear an existing mortgage?

It may be used to repay an existing mortgage, subject to eligibility and the amount available.

The existing mortgage normally needs to be cleared when the lifetime mortgage completes.

Can I release equity more than once?

A drawdown facility may permit later withdrawals.

Further borrowing may also be possible, subject to the original provider’s terms, available equity, and criteria at that time.

Is equity release suitable for paying debts?

It can repay debts, but it converts them into borrowing secured against the home.

Free debt guidance and other solutions should be considered first, particularly where someone is struggling with repayments.

Should family members be involved?

The decision belongs to the homeowner.

However, discussing the plan with family may reduce misunderstandings about inheritance, future care, and property arrangements.

How long does equity release take?

Timescales depend on the property, valuation, legal work, provider, and complexity of the case.

No completion date should be treated as certain until the legal and lending requirements are satisfied.

Is equity release right for everyone over 55?

No.

Age may establish basic eligibility, but suitability depends on the person’s needs, finances, property, alternatives, and future plans.

A decision about time as well as money

Equity release converts part of a property’s future value into money that can be used today.

That exchange may solve a present need. It can also reduce choices available later.

The right question is therefore not simply, “How much can I release?”

It is:

What will this decision allow me to do now, and what might it prevent me from doing later?

A regulated adviser can help place both sides of that question into measurable terms.