What is equity release and how does it work?

Equity release is a way of releasing cash from your home without having to move – but it comes with certain risks. 

How does equity release work?

Equity release is a way of accessing some of the money tied up in your home without having to move. There are two main types of equity release and they work in different ways.

What are the different types of equity release?

• Lifetime mortgage. This is the most common type of equity release. Like a traditional mortgage, it's a loan secured against your home, but it doesn't usually need to be repaid until you die or move permanently into residential care.
• Home reversion plan. This plan allows you to sell part (or all) of your home while you stay living in it. The reversion company then gets a share of the proceeds when your home is sold – usually after you die or move into permanent care. They don't pay the market rate, so your estate might be significantly reduced if you die shortly after taking out the plan.

Who can get equity release?

Whether equity release is an option for you depends on a few things:

Your age

For a lifetime mortgage, you (or both of you if you're borrowing jointly) generally need to be at least 55 years old. However, some lifetime products are now available from 50 years old.

For a home reversion plan, you (or both of you if you're borrowing jointly) need to be at least 60 years old.

Your home

You must own property in the UK, and it must be your main residence. Your property also needs to be in reasonable condition and over a certain value. There may also be restrictions on the type of property accepted.

You might still qualify for equity release if you have a mortgage or other loan secured against your property – but it will depend on the value of your home and the amount you owe. You'll have to pay off any outstanding mortgages or loans secured against your home at the same time as taking equity release.

Your family

Equity release can be complicated if you live with any dependents. To stay living in the property with you, they might need to sign a waiver confirming they understand they don't have the right to keep living in the property if you die or move into permanent care.

Equity release could also affect someone coming to live with you in the future. If a family member or friend moves in after you take out equity release, they'll have to sign a waiver releasing any rights to the property.

Any dependents, family or friends should get independent legal advice before moving in or signing a waiver.

What are the advantages and disadvantages of equity release?

Understanding the features and risks of equity release can be complicated. We've outlined some of the advantages and disadvantages below of both types of equity release, but you should get further advice.

Always get advice from a fully qualified and experienced equity release adviser. They'll review your personal circumstances and see if there are any possible alternatives. If equity release is the right option for you, they’ll provide a recommendation of the type that best suits your requirements.

Advantages

• You can get a tax-free lump sum and/or smaller, regular payments to supplement your income, and can continue to live in your home until you die or move into permanent residential care.
• You may continue to benefit from any rise in the value of your property.
• You can still move to a different property in the future, as long as it's acceptable to the equity release provider.
• With a lifetime mortgage, you continue to live in and keep ownership of your home.

Disadvantages

• Equity release reduces the value of your estate and the amount that will go to the people named as beneficiaries in your will. Your estate is everything you own, including money, property, possessions and investments.
• With a home reversion plan, the reversion company owns all or a part-share of your home.
• Getting a lump sum or taking extra cash to supplement your income may reduce your entitlement to means-tested benefits, now or in the future.
• If you get care at home and it's funded by the local council, either fully or partially, the local council may start charging you or ask you to pay more.

Does equity release affect your benefits?

Equity release can affect current and future benefit entitlement. If you receive any means-tested benefits, they may be reduced or lost entirely. Means-tested benefits include:

• Pension Credit
• Jobseeker’s Allowance
• Income Support
• income-related Employment and Support Allowance
• Universal Credit
• Council Tax Support.

A specialist equity release adviser will be able to advise what will happen to your benefits if you take out a plan.

How can I protect myself if I'm taking out equity release?

All firms advising on or selling equity release have to be regulated by the Financial Conduct Authority (FCA). This provides protection, security and access to the Financial Services Compensation Scheme if you ever need it.

You should choose a product from a company that's a member of the Equity Release Council. This is an industry body and its members agree to follow a voluntary code of conduct and meet certain product standards. When these standards are met it means:

• You can live in your property for life, or until you move into permanent residential care.
• You can move your plan to an alternative property (providing it's acceptable to the equity release product provider).
• You'll never owe more than the value of your home when it's sold after you die or move into permanent residential care.
• For lifetime mortgages, the rate of interest you pay has to be fixed for each release of funds or, if you have a variable interest rate, the rate has to be capped for the life of the loan.
• For lifetime mortgages, you can choose to make penalty-free repayments on your loan (providing it meets the criteria of your equity release provider).

Always make sure you speak to a specialist equity release adviser, and that both the adviser and the equity release provider are authorised by the FCA. If something goes wrong with your plan, contact your provider first. They'll have a complaints procedure to follow. If you’re not satisfied with the response, you can contact the Financial Ombudsman Service to see if they can help.