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What is Equity Release and How Does it Work?

Written by Reviewed by Graham Norwood

19th May 2020 (Last updated on 3rd Jul 2020) 7 minute read

Equity release allows you to access money tied up in your property, providing you meet age and financial criteria: at the same time, you can stay in your existing home.

So for example, if your house is worth £250,000 and you have an outstanding mortgage of £50,000, then you would have £200,000 in equity. If your house is worth £250,000 and you have paid off your mortgage, then you have £250,000 in equity.

If your outstanding mortgage is higher than the current value of your property, then you will be in negative equity - there is no ‘positive’ equity to release. Read our guide for more information on what negative equity is and what your options are. 

Compare My Move work with property industry experts to bring you fact-checked advice articles to guide you through the buying and selling a house process. This guide will explain everything you need to know about equity release. 

This article will cover the following:
  1. How Does Equity Release Work?
  2. What Are The Types of Equity Release?
  3. How Much Does Equity Release Cost?
  4. How Long Does Equity Release Take?
  5. Pros and Cons of Equity Release
  6. Save On Your Move With Compare My Move

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.

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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 installments, 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 Equity Release 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.

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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. 

Advantages of equity release:

  • You don’t have to pay tax on the cash released
  • You can still live in your home 
  • No need for monthly repayments 
  • You don’t have to worry about owing more than your property’s value

Disadvantages of equity release:

  • Interest rates are higher than standard mortgages
  • Your debt is increased by interest rates 
  • You could be subject to early exit mortgage fees
  • You won’t be able to leave your property as inheritance

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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Martha Lott

Written by Martha Lott

Having written for Huffington Post and Film Criticism Journal, Martha now regularly researches and writes advice articles for everything moving house related.

Graham Norwood

Reviewed by Graham Norwood

Property Journalist and Editor,

With over 15 years of experience in residential property journalism, Graham is currently the editor for both Estate Agent Today and Letting Agent Today.