How do equity release schemes work?

What is equity release?

Equity release is the name given to a range of products that let you access the equity (cash) tied up in your home if you are over the age of 55. You can take the money you release as a lump sum or, with some schemes, several smaller amounts. There are two main equity release options:

  • Lifetime mortgage: you take out a mortgage secured on your property. Unlike an ordinary mortgage, you don’t normally make any repayments while you’re alive. Interest is added to the loan and the loan amount and interest are paid back when you die or when you move house.
  • Home reversion: you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You have the right to continue living in the property until you die, but you have to agree to maintain and insure it.

Lifetime mortgages

Most people who take out equity release use a lifetime mortgage. Because you don’t have to make any repayments while you’re alive, interest ‘rolls up’ (unpaid interest is added to the loan). This means that the debt can increase quite quickly. Some lifetime mortgages let you pay interest, or some of the interest, as you go.

In the same way that ordinary mortgages vary from lender to lender, so do lifetime mortgages. When considering a lifetime mortgage, you should check:

  • The minimum age at which you can take out a lifetime mortgage. Many lifetime mortgage providers insist that you are at least 60 or 65 before you can apply. We’re all living longer so the earlier you start the more it is likely to cost in the long run.
  • The maximum percentage you can borrow. You can normally borrow up to 60% of the value of your property. The percentage typically increases according to your age when you take out the lifetime mortgage.
  • Different lifetime mortgage providers may have slightly different thresholds.
  • Whether you can pay some or all of the interest. If you can do this, the mortgage will be less costly. However, with a lifetime mortgage where you can make payments, the loan amount may be based on your income as well as the value of your home. Providers will also have to check that you can afford these regular payments.
  • Whether you can withdraw the equity you’re releasing in small amounts as and when you need it or whether you have to take it as one lump sum. The advantage of being able to take money out in smaller amounts is that you only pay the interest on the amount you’ve withdrawn. If you can take smaller lump sums, make sure you check if there’s a minimum amount.
  • What level of maintenance you’ll be expected to carry out and how often your property will be inspected (this could be every few years).

Home reversion

Home reversion allows you sell some or all of your home to a home reversion provider. In return you’ll get a lump sum or regular payments. You will normally get between 20% and 60% of the market value of your home (or the part that you sell).

When considering a home reversion plan, you should check:

  • The minimum age at which you can take out a home reversion plan. Some home reversion providers insist that you are at least 60 or 65 before you can apply.
  • The percentage of the market value you will receive. This will increase the older you are when you take out the plan but may vary from provider to provider.
  • Whether or not you can release equity in several payments or one lump sum.
  • What level of maintenance you’ll be expected to carry out and how often your property will be inspected (this could be every few years).

Things I need to know about equity release

Equity release may seem like a good option if you want some extra money and don’t want to move house. However, there are drawbacks:

  • Equity release is expensive. If you take out a lifetime mortgage you will normally be charged a higher rate of interest than you would on an ordinary mortgage and your debt can grow quickly if the interest is rolled up. Home reversion plans don’t give you anything near to the true market value of your home.
  • If you borrow too much you may not have the money you need later in your retirement, for instance if you need to pay for long-term care.
  • Equity release can make it hard to move. If you decide you want to downsize later on you may not have enough equity in your home to do this.
  • The money you receive from equity release may affect your entitlement to state benefits and may mean you end up paying more tax.
  • You will have to pay set up and/or arrangement fees, which can be expensive.
  • There will be less for you to pass onto your family when you die, and the value of your home may disappear completely.
  • These schemes can be complicated to unravel if you change your mind.
  • There may be early repayment charges, which could be expensive.

Getting advice

If you are thinking of taking out an equity release product, you should take financial advice from a specialist. All advisers recommending equity release schemes must have a specialist qualification, check that your adviser does, and:

  • Searches whole of market, so they can find the right plan for you
  • Is on Financial Conduct Authority register (you should search by the firm’s name). A firm that is on the FCA register must sign up to the Financial Ombudsman Service, which is a free-to-use complaints service if you’re unhappy with their response to a complaint

Before you decide whether or not to take out an equity release product, ask the adviser:

  • What their fees are
  • What other fees you’ll have to pay (legal, valuation, set up costs)
  • What type of equity release products they can they can offer