What is Equity Release and How Does it Work?

Written by Martha Lott Reviewed by Graham Norwood

17th Sep 2021 (Last updated on 9th Apr 2024) 10 minute read

How Does Equity Release Work?

To be eligible for equity release, you must be over 55 (or 65 for a specific form of equity release called a home reversion scheme) If eligible you can release the equity in instalments or one large lump sum. You don’t need to have paid off your mortgage to be eligible for equity release.

To work out how much equity you could release, you must subtract any outstanding mortgage from the current value of your property. Over the years, some areas of the UK have seen a significant increase in house prices, meaning many people will have access to a good amount of equity - but as we will show, you are unlikely to receive the highest possible market value for your home if you go down the equity release route.

There are two main options to release the equity in your property. The first being a lifetime mortgage where you take out a loan against your house, or you can sell part or all of your house with a home reversion scheme.

What Are The Types of Equity Release?

The two types of equity release schemes are lifetime mortgages and home reversion schemes. A report from the Equity Release Council shows that drawdown lifetime mortgages were the most common type of equity release in 2018, with 65% of new customers and just 1% of new customers chose a home reversion scheme. The remaining 34% chose lump sum plans. Below we will look at both in more detail.

Lifetime Mortgage:

A lifetime mortgage is a type of equity release scheme that allows you to free up some equity in your property. It allows you to borrow some of your property’s value set at a capped or fixed interest rate. The money is repaid after you die or move into a care home on a permanent basis.

If you take out a lifetime mortgage, you will continue to own your own home. To ensure the equity release still leaves some of the equity as an inheritance for children, many people ring-fence some of their property’s value and do not withdraw that as equity release.

The most popular type of equity release, as an owner you must be over 55 to qualify for a lifetime mortgage. The majority of lifetime mortgages don’t require you to make repayments which means the interest you owe is increasing all the time, and deducted from your estate when you die or enter a care home. However, some mortgage lenders will allow you to pay back the interest.

Data from the Equity Release Council reported that in 2019, there was an 80% rise in demand for regular interest payments for lifetime mortgages with over 58% of lifetime mortgages offered a 5% or less interest rate.

Home Reversion Scheme:

Another type of equity release is via a home reversion scheme. Regulated by The Financial Conduct Authority (FCA), a home reversion scheme will allow you to free up some money in your property that you can use to pay for your care at a later date. You must be over 65 to be eligible for a home reversion scheme.

With a home reversion plan, you sell part of all of your house for less than its market value. In return, a provider will pay you a tax-free lump sum or in monthly instalments, usually between 20% and 60% of the value. You won’t be able to sell your home until you move into care or pass away, but the scheme will allow you to live in your house rent-free on a long-term lease.

One the most popular type of equity release, home reversion schemes are now the least popular, making up less than 1% of all equity release plans sold in the second half of 2018, data from Equity Release Council shows.

How Much Does Equity Release Cost?

Equity release costs will vary depending on the provider you choose and whether you go for a lifetime mortgage or a home reversion scheme. The typical costs for equity release plan can range between £1,500-£3,000, according to Money Advice Service. Below are the fees associated with equity release for the two main types of plan.

Lifetime Mortgage Fees:

• Financial advisor - If you need to appoint a financial advisor, you have the choice of paying the fees upfront or have them added to the loan.
• Legal fee - You will need an equity release solicitor to act on your behalf fro the legal side of the process. You will typically pay this on completion.
• Valuation fee - You will need a chartered surveyor to carry out a valuation of your property before you can get your equity release. Remember to factor property survey costs into the overall cost of equity release.
• Arrangement fee - You will have to pay an arrangement fee upfront for a lifetime mortgage just like you would for a standard mortgage.
• Interest rate - The average interest rate for a lifetime mortgage is around 5%, with some being under 3%. Whilst this is the cheapest lifetime mortgage interest rates have been for a while, this is still more expensive than standard mortgage interest rates.

Home Reversion Scheme Fees:

• Financial advisor - This will need to be paid to the provider for setting up the home reversion scheme as well as paying for their expert advice. Usually paid upfront.
• Legal fees – It’s advised that you appoint your solicitor instead of the provider’s solicitor. Legal fees will be paid at the end of the process.
• Arrangement fee - This will be paid to the provider for the home reversion plan product.
  
• Valuation fees – You will need a surveyor to carry out a valuation of your property. This will determine how much you are entitled to from your home reversion scheme.

How Long Does It Take?

An equity release application takes between four and six weeks for a lifetime mortgage and between six and eight weeks for a home reversion scheme. The time it takes for the whole process to be complete will vary on the surveyor and solicitor you choose.

Once your application has been approved, you will need to get a valuation of your property carried out by a chartered surveyor. Your equity release solicitor will also begin the legal process of your equity release scheme, liaising with the mortgage lender until completion.

To ensure a smooth process during the equity release application, we recommend researching a solicitor and surveyor beforehand. By appointing them early on, you can guarantee a quick and stress-free process.

Is Releasing Equity the Right Decision?

Equity release can be a good way to boost your finances to ensure a more comfortable retirement. It can help increase your income and top up your pension, helping you later in life. However, it’s not for everyone and you do have to follow certain criteria to be eligible.

To be eligible for equity release plans, you must:

• Be aged 55 or over
• Be the owner of a property in the UK that is worth £70,000 or more

It’s important to note that different plans have different conditions so you’ll need to speak to an adviser before deciding. Some lifetime mortgages also require you to borrow at least £15,000, live in the home permanently and be mortgage-free or have a small mortgage on the property. Don’t forget to read the small print and to research which plans you are eligible for.

If you don’t want to downsize, don’t mind reducing your family’s inheritance or you don’t think your other sources of income will be enough, then releasing equity could be the right decision for you. You should first discuss your situation with an independent financial adviser before committing to a plan.

However, if you’d prefer to downsize or want to preserve as much of your estate as possible for your family to inherit, then equity release will not be the right path for you.

It also won’t be the best decision for you if you believe you have enough money to see you through retirement or you have other investments that could support you. You will need to think about how the decision to release equity may affect your future choices as well as your future financial position.

Pros and Cons of Equity Release

Equity release is a popular way to enjoy the money tied up in your property, and allows you to enjoy a more exciting later life. There are advantages and disadvantages associated with equity release which we’ve listed below.

Alternatives to Equity Release

Equity release won’t be your only option, especially as more and more mortgages are becoming available to older borrowers. If you own the property outright, you may be able to take out a mortgage or even remortgage to reduce your monthly payments. Remember, you'll need the help of a remortgage solicitor for this.

There is also the option of downsizing. Smaller homes are often cheaper and so you may find it cuts your monthly costs enough so that you don’t have to release equity.

You can also compare savings accounts to maximise your savings and investments.

Getting Professional Advice on Equity Release

Equity release is a large financial commitment and so you should take the time to research and discuss the options available to you before deciding. There’s a lot of different factors to consider and so it’s vital you get professional equity release advice.

You should try speaking to a range of different experts including mortgage advisers, financial advisers and solicitors. There are also a number of specialist advisers who will be more experienced in dealing with equity release advice and products specifically. Before choosing an adviser, it’s vital you check their qualifications and experience to ensure they can suggest the best plan that will be most suited to you.

It’s important to remember that any adviser who is recommending equity release schemes must have a specialist qualification. When searching for advisers, ensure they:

• Explain their fees carefully
• Explain the type of equity release products they offer
• Are on the Financial Conduct Authority (FCA) register
• Have the necessary qualifications and experience
• Are a member of the Equity Release Council member directory

Key things to remember:

• Any equity release firm you consult or use should be a member of the Equity Release Council and follow the ERC’s code of conduct.
• You will have to pay application fees which could be as high as £700.
• Alternatives to equity release include downsizing (selling your existing home and buying a smaller cheaper property); or letting out part of your home to create an additional income, or even remortgaging if that would mean any existing mortgage would involve a reduced monthly repayment cost.

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