Equity Release Explained | moneyfacts.co.uk

More and more of the over 55s are now using equity release to help fund their retirement. Low interest rates and access to tax-free cash is making equity release an increasingly popular choice for more older borrowers. 

Our guide below explains everything you need to know about equity release or contact our preferred broker MCB Financial Services to find out more.

Apply for equity release or call 01603 964923

A guide to equity release

Michelle Monck

Michelle Monck

Consumer Finance Expert

What is equity release?

Equity release is a way to unlock cash trapped in your property, tax-free while remaining in your own home. It is for property owners aged at least 55 and over and it has two forms: Lifetime Mortgages and Home Reversion plans. A Lifetime Mortgage is a loan secured on your property, whereas a Home Reversion plan is when you sell your property or a share of it and continue to live there rent-free. Both options allow you to reserve a share of your property’s value for your family’s inheritance.

Lifetime mortgages

A lifetime mortgage is a type of equity release. You borrow a set amount of money and use your property as security. Unlike a mortgage you do not need to pay back the loan and can choose to let the interest ‘roll up’ over time. This means the interest is added to your original loan and your debt will increase over time. Some lifetime mortgages will now allow you to pay some or all of the interest. Other plans permit penalty free partial repayments up to usually 10% annually which can include both interest and capital.
When you die or go into long term care the loan needs to be repaid including the interest. This is usually done through the sale of the property.

Home reversion plans

Home Reversion plans allow you to sell your property or a share of your property to an equity release provider. This can be received as a lump sum payment or a regular payment. You continue to live in the property rent-free but must agree to insure and maintain it. You will receive a percentage of the property’s value you are selling; this can be between 20% and 60% depending on your age.


Home reversion plans are also available with fixed or escalating rent options. The amount of rent paid will determine the amount of cash released and vice versa. However, rental options fall outside Equity Release Council standards because of the risk of losing your home if rental payments are not kept up.

Find out if you are eligible for equity release

Read our eligibility check list and find out more about how to apply for equity release.

How does equity release work?

A Lifetime Mortgage can usually be accessed from age 55 onwards and can be a way of supplementing your retirement income using the value tied up in your home. Your equity release lender will decide how much you can borrow depending on your age, medical history and the property’s value. The maximum amount they can lend to you is dependent on the plan you choose. Some providers will lend up to 60% of the property’s value but an average maximum loan to value (LTV) is just under 50%. In addition, the amount available will also depend on the age of the borrower with the highest LTVs available to older borrowers. Interest rates on lifetime mortgages are usually higher than a standard mortgage, ranging from just under 3% up to 7%. The rate must be fixed or if it is a variable rate there must be a cap or upper limit for the life of the loan. If you want the option to make repayments to your lifetime mortgage your lender will need to check these are affordable for you. Making repayments will reduce the interest costs incurred on your lifetime mortgage.


If you decide to use a Home Reversion plan, then you will need to check any minimum age requirement of the provider. Usually providers will only accept people aged 60 and over.
You should check if your equity release product allows drawdowns or if it is a lump sum plan. To drawdown funds means you access your cash in stages rather than all in one go. The advantage of this is that for a Lifetime Mortgage you only pay interest on the cash you have taken and for a Home Reversion Plan you may get a greater percentage for your property as you get older. Some equity release providers may set a minimum amount for each drawdown.

 


Lifetime Mortgages and Home Reversion Plans offer a no negative equity guarantee. This means that when the equity release provider sells your property, they will be responsible for any shortfall between the sale value and the amount you borrowed or received using equity release. Your estate will not be responsible for covering any losses.
Another important consideration is that with equity release you can also allocate a percentage of the property’s value as an inheritance for your family.

Comparing lifetime mortgages and home reversion plans

  Lifetime Mortgage Home Reversion Plan
What is the minimum age? 55 Varies but usually 60
How much money could you get? Up to 60% of the property's value 20% to 60% of the market value of your property
Can you payback the loan? Yes, subject to agreement from the equity release lender Yes, subject to agreement from the equity release lender
Negative equity guarantee? Yes Yes

Find out more about the differences between home reversion plans and lifetime mortgages. 

How can equity release be used?

How you choose to spend your cash is up to you, but equity release is often used to help supplement a pension, to buy a new car, make home improvements or to refit a home to suit changes in mobility or to go on holiday. Sometimes those using equity release may also choose to gift money to their family members, for example contributing to a deposit for a house and helping their grandchildren get onto the property ladder.

What are the costs of equity release?

A lifetime mortgage equity release product charges interest at rates of between just under 3% up to 7%. While this is higher than a conventional mortgage it is the effect of compound interest over many years that really increases the cost of equity release.


For example, if you borrowed £80,000 at 4% you would accrue £3,200 in interest in year one. At the end of year one this interest is added to you loan, now totalling £83,200 and you would accrue interest on this amount. At the end of year two you would have an additional £3,328 in interest to add to your loan. After seven years you would accrue £21,381 in interest and owe £101,381.


There is good news though, you can cut the costs of equity release by choosing a product that allows you to pay back some or all of your interest and the no negative equity guarantee available on all equity release products means your beneficiaries will not have to make up any shortfall should your property be worth less than your total debt.

Other equity release fees

In addition to interest costs you will also have to pay other fees to get an equity release product. These include:

Valuation fees

Just like a mortgage the equity release lender needs to obtain a valuation of your home. This can range from a quick inspection through to a more detailed assessment. The lender will also want to know how other property nearby has sold and the prices they have obtained.

Arrangement fees

Some lenders may include an arrangement fee for your equity release product. These can range from £500 - £3000. Some lenders offer fee free packages but usually at a higher rate.

Consultation fees

You need to receive advice from a qualified financial adviser to get equity release. They usually charge a set fee of a percentage of the loan amount, usually between 1% to 2%.

Solicitor fees

You will need a solicitor to make sure your equity release is managed correctly and any change in ownership is documented correctly.

Early repayment charges

Lifetime mortgages are designed as a long-term arrangement with repayment made on the sale of the borrower’s home when they die or move into long term care. If you decide you no longer want the mortgage and decide to pay it back earlier you could incur an early repayment charge. These can be expensive ranging from 3% up to 25% of what you have borrowed. Some lenders will waive the early repayment charge for those who settle their lifetime mortgage due to moving home. There are no early repayment charges if you die or move into long-term care. Some lenders will allow the lifetime mortgage to be repaid when the first borrower dies if the remaining borrower wishes to move home and redeem the lifetime mortgage.

If you have a home reversion plan, then you can choose to buy back your property or a share in this but will need to pay full market value for it. This could result in you paying more your property or share than you received form the equity release provider.

Why is equity release more expensive?

Equity release can be more costly than a traditional mortgage, for example the current average rate for a traditional residential mortgage is 2.57% compared to 4.19% for equity release. There are three reasons why equity release is more expensive than a conventional mortgage:

  1. Lenders do not know when they will get their capital back, unlike a conventional mortgage with a set repayment schedule
  2. Lenders are also less likely to receive any cash back for the money lent out, equity release allows borrowers to not make any payments at all
  3. The no negative equity guarantee – the lender needs to include a buffer to make sure they are not hit by any potential losses from a reduction in property values

Am I eligible for equity release?

You must own a property in the UK to be eligible for equity release – this can be owned outright or still have a small mortgage. There are also minimum requirements for your age, the value of the property and how much you want to borrow. You will not need to complete an affordability assessment for a lifetime mortgage and equity release lenders will consider those with a poor credit history.

The minimum age for equity release starts at 55

Equity release providers offering lifetime mortgages usually require a minimum age of 55. A home reversion plan could have a slightly higher minimum age of 60. If you are below the age of 55 and already retired then you could consider a Retirement Interest Only mortgage instead.


If you are a couple looking for equity release and only one of you is over the minimum age, you could still get an equity release product, but the younger partner would need to be removed from the deeds.

The location of your home is a factor

The broad rule for your property to be considered for equity release is that it is in the UK. However, like standard mortgages, there are more lenders available for properties located on the mainland versus those lending in Northern Ireland and the Channel Islands and the Isle of Man are often excluded.

The value of your property must be at least £70,000

Your property must be worth at least £70,000 and be in good condition to qualify for equity release. If it does not meet the standards required, you may be declined for an equity release loan. If your property needs essential repairs then you may need to fix these.


When you take a lifetime mortgage you will be responsible for the maintenance, up-keep and insurance of your property.

You have a poor credit history

Equity release lenders will consider a poor credit history, but your acceptance will be dependent on the terms and conditions of the lender and the nature of your credit history issues. If you are bankrupt you may not be accepted for equity release, however there are some lenders who will accept county court judgements (CCJs) and an adverse credit history.

Is equity release safe?

Equity release providers are regulated by the Financial Conduct Authority and increasingly many are members of the Equity Release Council. This trade body has a set of regulations designed to make sure consumers are protected when using equity release products from their members.


Some of the safeguards for consumers include the no negative equity guarantee and security of tenure. This means that when borrowers use a lender that is a member of the Equity Release Council they will never owe more than the value of their property and can be assured that they can live in their home for as long as they wish.


Furthermore, equity release can only be obtained following financial and legal advice and unlike a traditional mortgage it has no risk of repossession.

Pros and cons of equity release

  • Access tax-free cash tied up in your property
  • No risk of repossession
  • You get to stay in your own home
  • Option to take a lump-sum or drawdown funds as needed (lifetime mortgage only)
  • No negative equity guarantee means you will never owe more than the value of your house
  • Interest costs for a Lifetime mortgage builds over the years
  • Home reversion plans offer below the market value for your home
  • Interest rates are usually higher than Retirement Interest Only mortgages
  • Your beneficiaries could see their inheritance eroded through interest costs or through having a smaller share of the property
  • The amount you can borrow is less the younger you are

The importance of professional advice

Professional financial and legal advice is essential when considering equity release. Receiving advice is a mandatory part of the process but a good adviser will also talk to you about what you are wanting to achieve with the money, the potential alternatives, such as down-sizing and any risks and upsides of the alternative products available. In summary your adviser will:

  • Consider if equity release is right for you and suggest alternatives if not
  • Tell you which type of equity release is most suitable for you: a lifetime mortgage or a home reversion plan
  • Share with you a personalised illustration showing you the overall cost and fees, what happens if you don’t want equity release anymore, a description of the provider and the product including an interest rate for lifetime mortgages, any additional product features and what you have said you want to release in funds and the type of product you are interested in
  • Identify those providers who offer the product features most important to you, such as avoiding early repayment charges if you wish to payback your loan, no negative equity guarantees to make sure you never own more than you borrow and how to protect your beneficiaries inheritance
  • Make sure your family understands how equity release works and any impacts it may have on their inheritance
  • Find the best interest rate for your circumstances and credit history

Moneyfacts tip

Speak to an equity release adviser

Our preferred later life borrowing advisers, MCB Financial Services are equity release and later life borrowing specialists, and can help ensure that releasing equity from your home is the right decision. MCB Financial Services will consider all borrowing options including retirement interest only borrowing when making a recommendation.

Does equity release affect tax credits, benefits or pension entitlement?

Equity release may affect your eligibility for tax credits or benefits, this is because many of these benefits are means-tested. Having a certain amount in your savings or additional income can change what you are entitled to. Your financial adviser should be able to help you understand if this will be a risk.
However, your state pension typically won't be affected, as this is an entitlement for everyone over state pension age, depending on your National Insurance record.

Equity release FAQs

You can find out more about the affect of equity release on benefits in our Equity Release FAQs.

Is equity release ever a bad idea?

Taking out a lifetime mortgage can be a lifeline for those who may not have a decent pension pot, or who aren't willing or able to downsize into a smaller property. As long as you fully understand the process – including the type of lifetime mortgage you're getting, how interest is charged and how it can impact everything from inheritance tax to state benefits – it could prove to be a viable way to boost your bank balance in retirement.
That said, releasing equity from your home isn't a decision to enter into lightly, which is why you'll need plenty of support to determine if it's the right course of action for your particular needs. Not only will you need to thoroughly discuss it with your children as it'll affect the amount of inheritance you leave behind, but you'll need to seek suitable equity release advice, with this being a vital part of the process.

What are the alternatives to equity release?

Retirement Interest Only and Later Life mortgages are an alternative to Equity Release Lifetime Mortgages. Find our more about how they work in our guide. 

Consider a later life mortgage

Equity release is just one option to help boost your income in retirement. There are plenty of alternatives...

Continue to work part-time

There's nothing to say you have to stop when you reach state retirement age, and a growing number of people are choosing to stay in the workplace.

Maximise your savings

Are your savings and investments working as hard as they can? Speak to a financial adviser about getting the most from your savings portfolio. You can also compare savings accounts using our charts.

Downsizing

You could consider downsizing your property to a smaller one which should be cheaper than your current one. This effectively will release some equity, but without any borrowing involved.

Annuity income

If you want the assurance of a regular guaranteed income then you should look to find the best, personalised annuity rate.

Are you receiving the benefits you are entitled to?

Make sure you get all the benefits you're entitled to. You've worked hard all your life, so check that you're getting all the state benefits you're entitled to.

Back to top

Release tax-free cash and boost your retirement income

  • Available to homeowners aged 55+
  • Competitive interest rates fixed for the life of the loan
  • Only available by speaking to a regulated financial adviser
Provided by
mcb financial service ltd logo
How to apply for equity release

You can use equity release to fund your retirement, for example for home improvements, a dream holiday or for a new car. You could also use the cash as a gift to get your grandchildren on the property ladder. Check you are eligible for equity release by contacting our preferred equity release broker MCB Financial Services.

How to apply for equity release

Call now on 01603 964923

Lines open Monday to Friday 9am to 8pm.

Note

Any legal or contractual relationship will be with MCB Financial Services. There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. Moneyfacts.co.uk will receive a  commission from the lender. MCB Financial Services does not offer advice on annuities or investments.

Disclaimer

This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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