Updated: May 12, 2023
A Guide to Equity Release
Wondering if an equity release mortgage is right for you? Find out the pros, cons, lenders, rates and more in our in-depth guide!
Author: Pete Mugleston - Mortgage Expert, MD
Updated: April 21, 2022
If you’re looking to take money out of a property you own, and you’re over the age of 55 – then equity release could be a useful solution.
This guide covers all the details you need to know, including the potential pitfalls to watch out for and how much it costs. You’ll also find out where you can find lenders willing to assist with this arrangement and some alternative strategies to consider.
Keep reading for all the essential details or click a link below to jump straight to the section you want…
The following topics are covered below...
What is equity release?
This is a way for you to access money tied up in your home. You must be 55 or older to do this. But, it’s a useful way of releasing the capital that you’ve been building up whilst paying off your mortgage. You can release the funds tax-free as a lump sum, smaller instalments, or even a combination of both.
There are two main options to choose from when releasing equity from your mortgage or home:
Lifetime mortgages come in a number of different forms and structures. The most common ways of releasing equity are roll-ups (for a lump sum) and drawdowns (for instalments). All lifetime mortgages should allow the ability to select a fixed or capped interest rate.
In both situations there’s no monthly payments. But, interest accrues over time based on the amount you release. It’s then paid at the end of the term, which is usually when you die or move into long-term care.
Home reversion plan
With this way of releasing money from your property, you must be at least 60 years old. And, you’ll actually sell part of your house to a home reversion provider. Doing this often involves selling between 20-60% of the property, you’ll then receive a tax-free lump sum or regular income payments.
Often the property won’t be valued at the full market price and when the house is eventually sold, the home reversion provider takes their cut of the sale proceeds.
Most equity release experts do not recommend home reversion plans as lifetime mortgages are considered a better alternative, since you don’t need to relinquish ownership of your home.
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How does it work?
The exact process will depend on whether you opt for a lifetime mortgage or a home reversion plan. A lifetime mortgage is usually the most viable option because there is still plenty of room for flexibility. Whereas the home reversion means potentially giving up a large stake in what might be your biggest asset.
By releasing equity through a lifetime mortgage, you’d be borrowing money from what you’ve built up over time with your mortgage repayments. And then, using the property itself as security for the loan. You’ll still own the home, and the accruing interest plus the remaining debt is typically covered by the eventual sale of the home.
Take a look at our equity release calculator to see for yourself how this may work out for you…
Equity Release Calculator
You can use our equity release calculator to work out how much capital you can release from your home. Simply enter your age and the property’s value and the tool will do the rest.
Maximum Equity you could release:
The amount is of your homes value, the maximum most borrowers your age can release.
Get Started with an Equity Release Specialist and find out exactly how much you could release.
How to get an equity release mortgage
The process for arranging this will depend on your circumstances. But here are some actionable steps that you should follow to make sure you find the best deal and get everything set up properly:
Step One: prepare your documents and understand your needs
The first step involves understanding exactly what it is that you want. Think about why you want to pursue an equity release arrangement and what you’ll be using the funds for. It’s also worth having an idea about what you’d like to be the final outcome at the end of the term.
For example, do you want to pass the property down to your family or will you just sell the home? If selling the home, is it important you maintain total ownership? These are the kind of questions you need to think about initially. You should also try to gain a general grasp on the different products available.
Next, gather up your proof of address (utility bills or bank statements), an original form of identification (passport, driving licence, birth certificate), and your income information (if you’re still working). You’ll also need documentation for your current property.
Step Two: get expert advice
Once you’re clear on your motivations and have your documents to hand, you can take this information to a skilled advisor. A specialist equity release advisor will be able to discuss your plans and direct you towards the best solution and product for your personal circumstances.
After outlining a plan of action, they’ll be able to introduce you to specific lenders who’ll best serve your needs. Having an expert broker in your corner allows you to access the full range of available options. And, the added benefit of their guidance and support throughout every stage of the application.
Step Three: submit your paperwork and property valuation
After downloading your credit reports, your equity release advisor will assist with evaluating your scores, and then help make sure your application is in ideal shape before submitting it to lenders. Once this is taken care of, your broker will be able to liaise with your solicitor and assist with arranging the necessary valuation.
Following a successful valuation, an offer will be made and your solicitor can get all the legal paperwork together. Your solicitor will then set a practical date for completion and organise for your access to the funds from the equity release.
When going through this process, there’s a lot of moving parts. Access to an experienced advisor is going to be a worthwhile help from start to finish. The brokers we work with have plenty of experience organising competitive equity release arrangements for their clients. Just make an enquiry and we’ll introduce you to an expert broker for free.
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Why you might want to release equity from your home
There are plenty of reasons why this kind of arrangement might be useful to you. Opting for this strategy allows you some financial freedom without having to access your hard-earned pension or force you to downsize.
Equity release can be used for any legitimate purpose, including…
- Funds for retirement: you may want to supplement your pension or retirement income with some extra funds from your home (which might be your most valuable asset).
- Rising costs and inflation: if your cost of living increases, you may need access to extra money in order to maintain your same standard of living. Instead of working an extra job or selling assets, you can use equity to help keep up with rising prices and bills.
- Help support family: you may want to help a child, grandchild, or other family member with a significant purchase. This could be for their own home, further education, or even a wedding.
- Clear any debts: you may want to use an equity release arrangement to get rid of any existing debts. This could be smaller loans, credit cards, or expensive financing for a car. So, it can make financial sense to use funds from your property for this purpose.
- Home improvements: for those looking to renovate or improve an existing house, this can be a useful way to pay for those improvements without necessarily having to scrimp and save, or reduce your standard of living.
- Big ticket purchase or experience: you may be at a stage in life where you really want to treat yourself to something extravagant. Or, perhaps there’s a holiday destination you’ve been dreaming about for years.
Is equity release a good idea?
It can be, but it will depend entirely on your circumstances. If you own a home and need to access funds, it’s definitely an option worth thinking about. It’s also important to consider all the benefits and potential disadvantages before you decide to proceed.
Benefits of home equity release
Here’s a breakdown of the distinct advantages offered by using this route to gain better control over your wealth:
- The ability to access money from your home whilst also being able to live at the property until you die or move into long-term residential care.
- The bulk of your money may be tied up in your home, which is a fairly illiquid asset. This way you can access some of the funds that have been tied up with your property and mortgage.
- Tax efficient way to unlock some of your wealth.
- Flexibility to choose between a lump sum, instalments, or a combination of both.
- No monthly repayments need to be made.
- You don’t need to repay the loan until you (or the last homeowner on the deeds) dies or moves into care.
- A lifetime mortgage can come with a ‘no-negative-equity’ guarantee. This means you can rest assured your family won’t inherit any debt.
- Equity release is a safe process regulated by the FCA (Financial Conduct Authority). There are also organisations such as the Equity Release Council to help provide safeguards.
Risks and potential pitfalls
Of course, there are also some potential risks to understand before you decide if equity release is the right course of action for you:
- Your overall estate may be reduced if you take equity out of your home, leaving a smaller inheritance for your family. However, there are ways you can mitigate any potential impact with specific plans that allow you to ring fence inheritance funds
- Accessing money by releasing equity might affect your entitlement to certain government benefits.
- There’s usually a requirement for your home to be kept in a reasonable condition. So you’ll have to make sure you stay on top of the upkeep.
- You might face high early repayment charges if you change your mind about a lifetime mortgage and decide you want to repay it instead. But, some lenders will give you the opportunity to define these costs from the outset, so that you know where you stand.
- Interest payments can accumulate and add up to a large amount over time.
- Your property may go up in value and this could mean losing out on gains because you will be given a pre-agreed sum.
- The total cost can add up when you take into account your broker fee, legal costs, along with valuation and admin charges.
Availability of lenders and typical interest rates
Not every lender on the market will have the ability to organise an equity release arrangement. And even fewer will provide competitive interest rates. The rates table below illustrates how the deals can vary and will give you an idea of some of the best interest rates currently available.
Looking for more rates and deals?
We can match you with a mortgage broker who can provide you with up-to-date bespoke rates and deals from across the entire market and help you secure the best ones available.
Last updated August 2023
Please note that the above rates were accurate at the time of writing, but are always subject to change. Speaking to a mortgage broker is the best way to find the most up-to-date deals.
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Eligibility criteria and how much equity you can release
The criteria you’ll need to meet can be quite rigid and specific to each deal. However, there can be some nuance and flexibility with the arrangements depending upon the lender you use.
Here’s some examples of the typical requirements equity release providers have…
- Minimum thresholds: lenders will usually require the deal to be worth at least £10,000 to make it worth their while. Although, this minimum can stretch much higher. Some lenders will also only consider your application if you’re looking to release at least £70,000.
- Maximum release amounts: somewhere between 20-50% of your home’s market value will be the parameters for most lenders, but some will go higher or lower.
- Your age: you’ll need to be over 55 years old for a lifetime mortgage (both of you for a joint application), or over 60 for a home reversion plan. Not only this, but how old you are may also affect the deal you’re eligible for with both options. Being older can also mean you’re able to access a larger amount of equity.
- Your health: because this finance is aimed at older applicants, your current health will be taken into consideration. This helps make sure you get the most suitable solution for your circumstances. Poor health doesn’t mean being penalised, it can actually allow you to release a larger portion of equity.
- The property: your home’s value and condition can have a significant impact both at the beginning and the end of this process. The market value and property type can affect the loan value or lead to a complete rejection for non-standard construction homes.
How it could impact your tax situation
It’s always useful to get a decent grasp on how a big financial decision like this could impact your tax position. Knowing this will help you decide if this is the right kind of commitment for you to be making. Here’s some of the potential tax implications that could arise from a release of equity:
- The equity released from your mortgage is exempt from income tax, but what you next do with that money can affect your position.
- You could use up your ISA allowance of £20,000 to protect funds from tax, but anything in a regular savings account could lead to tax on the interest.
- Releasing equity could lower the value of your estate and potentially reduce your inheritance tax (IHT) bill.
If you need to access a large level of funds, this isn’t your only option. Here are some other solutions and alternatives to releasing equity out of your home:
- Downsize or move area: by selling your home and moving to a smaller property with a lower price tag, you can pocket some of the difference (depending on how much equity you own). You could also look to see if it’s possible to move to a similar sized property in a cheaper location. Although both options mean leaving your house, which is something you may not want to do.
- Retirement interest-only (RIO) mortgage: RIO mortgages are similar to a lifetime mortgage, except that you borrow equity from your home and make monthly payments just covering the interest. This way, the interest doesn’t accrue and the amount owed at the end of the term will just be the initial sum you took out.
- Existing savings: if you have an existing pot of savings, it could be worth dipping into these first before committing to releasing equity from your home.
- Use a loan: if your goal is to renovate, a home improvement loan can be useful because they’re secured against your house without the need for extra collateral. You might also be able to get by with a standard loan or credit card on decent terms while you make longer-term plans.
- Return to work or continue working: if you’re worried about financial security during your retirement, it may be worth continuing to work for a few more years to boost your pension or savings. Or, it might make sense for you to return to the workforce, providing you with some additional income through your later years.
Speak with an equity release expert
Releasing equity can be a useful and practical way to access money that’s locked into your home mortgage. However, this is a long-term commitment and it can be an expensive and lengthy process if you don’t deal with the right lenders.
We offer a free broker-matching service, which means we’ll quickly assess your needs and your goals for the equity release. Then, we’ll pair you up with a specialist advisor who has the experience and relationships to help you get set up with the best deal.
Our service won’t cost you anything for an initial chat. So just call 0808 189 0463 or make an enquiry and we’ll arrange a no-obligation chat between you and an equity release expert today.
This can happen, so it’s vital that you deal with an experienced broker who’s able to introduce you to the lenders who will be the most accommodating to your situation. This will give you the best chance of your application being accepted.
This is definitely possible to arrange. The overall deal you qualify for will be unique to your ownership position and how much the equity you own in the property is actually worth.
The process can vary depending on the lender, but it can be possible for you to start receiving some or all of your funds 8-12 weeks after the initial application. This is providing your paperwork is all in order and the solicitors and valuers act promptly. Using an advisor to assist arrange all this can definitely help with streamlining the timeline.
Yes. This is a highly regulated area of the financial industry and customers have protection from the Financial Conduct Authority and the Equity Release Council. However, releasing equity from a property is something that should never be done lightly, or without professional advice.
We have outlined the potential risks that some borrowers might need to consider, as well as the benefits of equity release, in this article.
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Mortgage Expert, MD
About the author
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!