Equity release: what is it and how does it work?

Equity release is a way that you can unlock value in your property without the need to move out.

You can use the money to pay for home improvements, help family members onto the property ladder, boost your retirement income or take the holiday of a lifetime.

What is equity release? How can you do it and how does it work?

what is equity release and how does it work

What is equity release?

Equity is ownership. When it comes to your house, your equity is the difference between its market value and any debts you have against it.

Equity release is the process of turning that equity into cash that you can spend, without having to move out.

How does equity release work?

There are two ways to release equity from your home – taking out a loan against part of it, with a lifetime mortgage, or selling part of it, with a home reversion plan.

  • Lifetime mortgages are by far the most popular form of equity release. A lifetime mortgage is a loan that is repaid when you die or enter long term care. The lender claims their proceeds from the sale of your home upon your death or entry into long term care.
  • With a home reversion plan you sell a portion of your home. When you die or enter long term care your house will be sold and the buyer will get their share of the proceeds.

With either product you can receive the money in a lump sum or over several instalments.

To release equity you need to have an equity release product recommended to you by a qualified adviser who has considered your unique circumstances. There are lots of things to consider, including inheritance and how equity release payments could affect your benefit entitlements or tax obligations.

Before identifying the right equity release product, the adviser will also help you to consider alternatives such as downsizing, remortgaging or a retirement interest-only mortgage.

Equity release isn’t always the right solution, but it is working for lots of people. Over 85,000 people released almost £4 billion of equity from their properties in 2019.

How much equity can I release?

The amount of equity you can release depends on many factors, including your age and the value of the property.

Use our lifetime mortgage calculator to get an estimate of how much equity you could release with a lifetime mortgage.


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Equity release mythbuster

There are still several common misconceptions about equity release.

  1. You can't end up in negative equity

All lifetime mortgages provided by Equity Release Council members come with a no negative equity guarantee.

This means that even if the property’s value crashes, or the loan plus interest adds up to more than the property value, you will never owe more than the value of your home.

  1. You can sell your home and move

Many lifetime mortgage providers offer the option to move and transfer a lifetime mortgage to a new property. It isn’t true that you can’t sell your home and move once you’ve released equity.

  1. You can make payments to manage the size of the loan

Many providers offer mortgages where you can pay the interest off monthly, meaning the original loan amount stays the same.

With some products you can pay back up to 10% of the loan each year without incurring fees, meaning you can reduce the interest and the capital. For example, if you take a loan of £100,000 you can pay back up to £10,000 each year.

These options provide you with more control over the value left in their property, and can help make sure there’s still value in the family home for children or grandchildren to inherit.

  1. You can pay it off early

After ten years a lifetime mortgage borrower can repay the entire loan without incurring any early repayment charges.

  1. You cannot lose your property

Although payment options are available, payment is not necessary, so there’s no risk of missing payments and having the property repossessed.

  1. You can benefit from increases in property value

With a lifetime mortgage you still own your property, so if the value of your property increases you still benefit from it.

With a home reversion plan you sell a portion of your property, so you’d only benefit from the growth in market value of the portion of the property that you retain ownership of. Your remaining equity.

Equity release has changed

In the video below, two of our Advisers Anna and James, discuss how the industry has changed over the last 15 years to the benefit of consumers. They look back at why the equity release industry has such a bad reputation and explain the many ways in which it has changed to mean that, for consumers in the right circumstances, a lifetime mortgage could be an option.

Find out if a lifetime mortgage is right for you

Get a free initial consultation with one of our advisers. We charge a simple fixed fee of £750 for our advice, only payable if you accept our recommendation.

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