Equity release
Equity release can be a great way to unlock funds from your property. We’ve partnered with Responsible Equity Release. Chat with them today to see how equity release could work for you.
What is equity release?
Equity release is a way of using your home to generate income – without having to downsize. Equity release mortgages work by allowing you to unlock the equity in your home in the form of a tax-free lump sum payment or payments.
What is equity?
Equity is the share of your home that you own outright. You can work out how much equity you have by deducting any remaining mortgage and secured loans against the property from the property’s value.
So, if your home is worth £300,000 and the outstanding amount you owe is £100,000, then your equity is £200,000.
Another way of using equity is to borrow against some of it to raise cash. This process is known as remortgaging.
Releasing equity is a big financial commitment. You’ll need to think carefully about its implications and ensure that you receive impartial financial advice before you do it.
Advantages and disadvantages of equity release
Equity release advantages
- Choose between a cash lump sum or several smaller payments.
- You can set aside some of the value of your property as an inheritance for your family.
- With a lifetime mortgage, you don’t need to make regular repayments.
- You can choose whether to pay back the interest to help reduce the overall cost of borrowing, or let it build up.
- The full amount borrowed, plus interest, is only repaid when the last homeowner passes away or enters long-term care. This is usually achieved through the sale of the property.
- You may be able to move home and transfer your lifetime mortgage, subject to your lender’s criteria.
- Some equity release lenders guarantee that the total amount you owe will never be more than the value of your property.
- Funds released on your property will be tax-free.
Equity release disadvantages
- You’ll immediately have less equity in your property.
- Equity release will reduce the value of your estate.
- If you opt for a home reversion plan, you’ll no longer be the sole owner of your property.
- A home reversion plan might not give you the true value of your property, compared to selling it on the open market.
- If you decide to pay back the loan early on, you may be charged an early repayment fee.
- If property prices fall, you may owe a greater percentage of your home’s value.
- The money you unlock could affect any benefits you may be entitled to.
Who qualifies for equity release?
You may be eligible for equity release in the form of a lifetime mortgage if:
- You’re a UK homeowner aged 55 or older. If you’re borrowing jointly, you both need to be aged 55 or older
- Your home is worth at least £70,000
- You want to borrow more than £10,000
- The home you want to release equity from is your permanent main residence
- You own the home you want to release equity from.
Why would I release equity in my home?
There are several reasons you might want to release equity from your home, from clearing an existing mortgage to releasing tax-free cash to help with the rise in retirement costs.
A lifetime mortgage allows you to release equity from your home without the need to repay the loan and interest, until the last homeowner dies or goes into long-term care.
Equity release calculatorWhat can equity release money be used for?
You can use money from equity release to improve your property or clear an existing mortgage.
You could also use the funds to:
- Clear outstanding debts, such as a loan or credit card, making it easier to manage your retirement.
- Go travelling – the funds from equity release could help you realise your dream of seeing the world.
- Adapt your home so you can continue to live independently for as long as possible.
- Supplement your retirement to make your life more comfortable.
Types of equity release
There are two equity release options: a lifetime mortgage or a home reversion plan.
Lifetime mortgage
You secure funds against a portion of your home’s value. In most cases, there’ll be limits on the percentage you can borrow.
Like other loans, interest will be added to your lifetime mortgage. But you have the option to either make voluntary monthly payments or let the interest accumulate. The total amount borrowed, plus interest, will be repaid with the sale of the home when the last homeowner either dies or goes into long-term care.
Home reversion plan
You’re essentially selling a stake in your home. This is usually at a rate much lower compared to its market value.
There are no payments to make with a home reversion plan. The debt owed will be repaid once the house is sold.
What is a lifetime mortgage?
A lifetime mortgage is the most common type of equity release option. With a lifetime mortgage, you continue to own your home while borrowing money secured against it.
Lifetime mortgages are designed to run for your lifetime with no requirement of monthly repayments. Interest is charged on the amount you release, and this is usually fixed for life.
Types of lifetime mortgage:
- The lump sum: you get a one-off, tax-free lump sum from your home. Should you choose not to make payments, the interest will roll up over time. The interest, along with the initial loan, is repaid once the last homeowner passes away or enters long-term care, usually through the sale of the property.
- The drawdown: you agree the total sum you can borrow with the equity release provider. You can then release an initial amount and keep the rest in an interest-free reserve to be accessed in instalments.
The interest rate on your reserve will be fixed at the time you access it, so bear in mind it could be higher or lower than your initial rate. The balance, plus any interest accrued, is usually repaid through the sale of the property once the last homeowner passes away or enters long-term care. - Flexible features are available: whether you release your equity as a lump sum or with a drawdown, there’s a variety of flexible features that could be available. You could make optional repayments, usually up to 10% of the initial amount borrowed per year or pay the interest each month. An equity release advisor will be able to tell you more about the features on offer.
Things to consider when taking out a lifetime mortgage
How much you can borrow
The amount that you can borrow is dependent on your age and the value of your home. The older you are, the more you can release.
Make sure that you speak to an advisor about the different products available, as this can vary among lenders. Sometimes, the amount that you can borrow can also be impacted by your health and whether you have any medical conditions.
Do you want it in a lump sum or not?
You can take the mortgage amount either in one lump sum or in smaller, regular amounts.
The lump sum might seem like the more attractive option, but if you don’t need it in one go, you’re better off taking it in separate amounts. That’s because you only pay interest on the amount you withdraw. So, don’t take it until you need it.
Will you pay any of the interest?
While you don’t have to, you can choose to pay some of the interest as you go. This could help you save on the overall cost of borrowing.
The loan rate
Make sure you compare rates when looking for the right lifetime mortgage. Depending on how long you continue to live in your home for, this can make a big difference. Equity release interest rates can vary, and interest can build up significantly over a long period of time.
Look for a no-negative-equity guarantee
A no-negative-equity guarantee ensures that your estate and beneficiaries won’t be responsible for any shortfall if the property’s sale doesn't cover the outstanding loan. The difference will instead be written off.
This means your estate (and beneficiaries) won’t be responsible for making up the difference.
Are you likely to move again in future?
If you anticipate moving to another home later in life after securing a lifetime mortgage, it’s important to proceed with caution. Lifetime mortgages are generally designed to last until you either pass away or enter long-term care.
However, under certain conditions, it’s possible to transfer the mortgage to a new permanent residence.
You’ll need to get in touch with your lifetime mortgage provider and make sure they’re happy with the property you’ll be moving to. This is because your new home is the one that will be secured against your loan.
What is a home reversion plan?
A home reversion plan is another type of equity release. But it works in a different way from a lifetime mortgage and is not suitable for everyone.
With a home reversion plan, you continue to live in your home, but you sell part or all of it to the reversion company. You then get a regular income and/or a tax-free lump sum. When your home is sold, the reversion company will take its share of the proceeds.
You don’t pay any rent, but you won’t get the full market value of your house. The price you get will depend on your health and your age.
What to consider when taking out a home reversion plan
Are you old enough to qualify?
Some providers have a minimum age requirement to qualify for a home reversion plan. Make sure you look around and seek equity release advice, as these age requirements can vary.
How much can you get?
Obviously, this depends on your home’s value, but it’s also about the percentage of that value that your provider is willing to offer. This varies among plans, so make sure you shop around. Usually, the best offers are available to older applicants.
A lump sum or regular payments?
Either way, make sure that your provider is willing to offer you the money in the way you need it.
Are you going to move again?
If there’s a chance you could move again (other than moving into long-term care), your potential new home will need to be acceptable to your home reversion plan provider. This is because the balance will be transferred and held against the new property.
If you’d like advice on a home reversion plan, you can find a qualified advisor at unbiased.co.uk.
Compare the Market’s equity release partner Responsible Equity Release don’t advise on home reversion plans.
How much does equity release cost?
The cost of equity release depends on the way you’re releasing the equity:
Lifetime mortgage
The cost of a lifetime mortgage can depend on several factors, including the interest rate, advice, lender and solicitor fees.
While monthly payments are optional, they can reduce the total cost of the loan over time, as interest is compounded and added to the loan amount. An equity release advisor will explain how making repayments can affect the overall cost, helping you make informed decisions.
They’ll able to create a personalised illustration for you, before you make the decision to go ahead with a lifetime mortgage. It will show you exactly how much you might owe in the future, if you don’t make any payments.
Home reversion plan
This doesn’t always come with a cost, as you’re simply selling a portion of your home to the provider at below-market value.
However, some lenders may charge a rental fee for you to remain in the property, in addition to other fees you might need to pay.
Equity release interest rates
It’s a good idea to shop around to find the best equity release rates for you. An advisor will be best placed to tell you what the interest rate will be, based on your age and the amount that you want to release.
Is equity release safe?
Equity release is regulated by the Financial Conduct Authority (FCA). Plus, the Equity Release Council has a code of conduct for safeguarding customers.
In terms of whether it’s safe for you personally, there are several things you can do to protect yourself:
- Get as much equity release advice and information as possible – equity release can be complicated, particularly for anyone new to the idea. To ensure that it’s the right move for your personal situation, you might want to discuss it with a fully qualified equity release advisor.
- Use a lender who’s part of the Equity Release Council – this is important to secure a no-negative-equity guarantee, which will protect your estate from owing more than your home’s value.
All lifetime mortgages offered by Compare the Market’s equity release partner Responsible Equity Release are from lenders approved by the Equity Release Council. - If possible, don’t take all the money in one go – while it might sound great to get a huge amount in a lump sum, don’t do it unless you have to. The more you release and borrow, the more expensive it will be. That’s because the interest will kick in as soon as you take the money.
You can break down the money into smaller, interest-free reserves, meaning while the amount is held, no interest is applied. But once you access the funds, they’ll be charged at the applicable rate of interest at that time.
Is equity release the right option for me?
Whether equity release is the best move for you depends on your situation. While there are short-term benefits, the long-term consequences can make it less attractive. It’s important you consider your current age, income and standard of living, and how equity release will affect your plans for the future.
Your age
Remember, the earlier you start, the more it’s likely to cost in the long term.
Your income and standard of living
If your income is lower than it used to be, whether that’s because you’ve gone part time or retired, you may need a financial boost to maintain your standard of living. Equity release can help replace the lost income and keep you going into retirement.
How much will you get?
This will likely be one of the main points to consider when deciding if equity release is the right move for you.
Your future
You may feel you’re very likely to remain in your current home and have no family who will inherit from your estate when you die.
In this case, equity release could offer you a large sum to live comfortably or fulfil a lifelong dream that you perhaps wouldn’t otherwise have been able to.
Your family’s future
While you’ll still be able to live in your current home without making further payments, releasing equity in your home will leave less for your family once you’re gone.
Releasing equity from your home may not be the best move for you if:
- You’re in a situation where you’re able to live comfortably in retirement
- You have a family you may want or need to provide for when you’re gone
- You may need to sell your home to fund moving into care.
Taking out an equity release product is a complicated decision with lots of factors to consider, so you should take financial advice from an equity release advisor.
All advisors recommending equity release options must have a specialist qualification. The advisors at our partner Responsible Equity Release are fully trained and are members of the Equity Release Council.
What are the alternatives to equity release?
If equity release doesn’t appeal to you, there are other options:
Moving home
If you need to raise money and have a valuable home, simply selling up and downsizing may be a great option. Alternatively, moving to a less expensive area could free up some extra money, without sacrificing the size of your home.
Stay in, or return to, work
If you’re worried about your retirement income, you could consider remaining in, or returning to, work to provide you with a regular income.
Taking out a home improvement loan
If you want help with funding an extension or a renovation, you could look at a home improvement loan. These can be secured against your home but are also available without any collateral.
Remortgaging your home
Remortgaging to get a better deal can help you save on interest payments or free up cash for home renovations, for example.
Taking out a second mortgage
A second mortgage is a loan secured on your property that’s taken out in addition to your mortgage. It’s a way of raising money against your property, but interest rates will often be higher on a second mortgage.
Looking for equity release advice?
All providers offering equity release products must give you advice, ensure that equity release is right for you and that the products suggested are suitable for your needs and circumstances. Equity release advisors must be appropriately qualified.
We’ve partnered with Responsible Equity Release to offer lifetime mortgages approved by the Equity Release Council.
What our expert says...
“Equity release can be a solution if you need money to supplement your retirement income and don’t want to downsize. However, make sure you fully understand the agreement you’re entering into and all the possible downsides as well as the benefits.”
- The Editorial Team, Experts in personal finance, insurance and utilities
What do I need to get a quote?
Getting a quote from Responsible Equity Release** is a simple four-step process:
- Use the free calculator to find out how much could be available to you
- Responsible Equity Release will send you a guide to equity release
- Call, email or chat with the Information Team about any questions you may have
- Once you’re ready, have the Information Team book you a free initial phone appointment with a qualified equity release specialist.
**Responsible Equity Release are not part of Compare the Market Limited. Compare the Market receive a % of the commission that our partner Responsible Equity Release earns.
Frequently asked questions
Can I sell my home if I have equity release?
If you have equity release, you can still sell your home. Lifetime mortgages are portable so you can move home, as long as your new home is acceptable to the lender.
Does equity release affect benefits?
Yes, releasing equity in your home could affect your entitlement to certain benefits.
If you already claim benefits, you must tell the Department for Work and Pensions (DWP) or your council about the money you’ve received from equity release. This is because it could affect how much you’re entitled to.
Does equity release affect tax?
You won’t usually need to pay tax on the equity you release from your main home. However, in some circumstances, it could change your tax situation. You may want to get advice from a tax professional before you go ahead with an equity release plan.
Can I get an equity release mortgage through Compare the Market?
While you can’t get make an equity release mortgage comparison through Compare the Market, we work with Responsible Equity Release.
They’re authorised and regulated by the FCA, and are members of the Equity Release Council. Their network of fully trained, specialist advisors can help you compare equity release options to find the right lifetime mortgage for you.
