Equity release: What is it and what to avoid? Equity release: What is it and what to avoid?

26 Jul 2022 | Comments: 0 | Author: Christina Bentley |

Equity release helps UK homeowners gain extra retirement income by allowing them to release some of their home’s equity. And in 2021 alone, it helped over 76,000 people release equity, according to the Equity Release Council.

Not sure what equity release is or how it works? Our in-depth guide will help you explore everything you need to know about equity release, its pros and cons and how to avoid working with dishonest companies.

For now, let’s get started with the basics.

What is equity release?

Equity release is a product which allows older homeowners to release some of their home’s value or equity as tax-free cash. Depending on the type of scheme you choose, you can opt to take this money as a lump sum, in smaller instalments or a mix of the two.

Once you’ve released cash, you can spend it as you like. Many retirees use equity release to gift to family and friends, while others use it to enjoy more comfortable retirements.

Other popular uses for equity release include:

  • Paying off your mortgage, credit card and other debts
  • Financing home renovations and improvements
  • Helping your children with a house deposit
  • Buying a new car or affording a dream holiday

Types of equity release

There are two main types of equity release that are both regulated by the Financial Conduct Authority (FCA):

Lifetime mortgages

This type of equity release is the most popular as it lets you keep full ownership of your home. Taking a lifetime mortgage means borrowing money against your home as a loan. As the name suggests, this type of plan ends when you either die or move into long-term care.

As with any loan, you’ll pay interest on the amount you release and it will usually roll up over time. The loan and interest are usually paid back from the sale or your home when you die or move into long-term care.

There are also hundreds of products on the market to choose from. Many give you flexible options such as interest repayments with no charges for early repayments.

Home reversion

This type of equity release plan lets you sell all or part of your home to a provider in exchange for a lump sum or regular payments. This amount usually ranges from 25% to 100% of your home. When you die or go into long-term care, the provider will

While you won’t keep full ownership of your home as you would with a lifetime mortgage, you can still live in your home as a co-owner until you die. Other benefits include the option to ring-fence a part of your home to leave as an inheritance.

Who is eligible for equity release in UK

Who is eligible for equity release?

Eligibility varies from provider to provider. But, to be eligible for equity release, you’ll usually need to:

  • Be aged 55 or older (or age 60 for a home reversion plan)
  • Own a property outright that’s worth at least £70,000
  • Live and own property in the UK

If you’re considering releasing equity, it must also be from a property that is your main residence. This property must also be in a decent condition that can be resold.

Can I release equity if I’m under age 55?

Equity release is a regulated product that can help people finance their retirements. That’s why providers require you to be age 55 or older for lifetime mortgages and at least 60 for home reversions.

But, if you’d like to release equity at a younger age, you could consider remortgaging your home to release equity. Speak to a financial advisor if you'd like to explore all your options.

Which types of property aren’t accepted by equity release providers?

When you take a loan on your property, it will need to be paid back. That’s why the equity release provider needs to ensure your property can be resold after you die or move into care. For this reason, many providers don’t accept the following types of properties:

  • Static and mobile homes or houseboats
  • Retirement properties
  • Studio or basement flats
  • Hotels, bed and breakfasts or guest houses
  • Farms

Your prospective provider may also ask about your home's age and condition to determine whether it would be attractive to a future buyer.

How does equity release work

How does equity release work?

When you make mortgage repayments or make home improvements, you’re increasing your home’s equity or value. Equity release lets you release that value as either a lump sum or smaller sums.

How it works is that you’re taking out a loan against your home to tap into your home’s equity to boost your retirement income.

How much equity can I release?

Many providers have a minimum requirement on how much you can borrow. This is usually £10,000, and will vary from provider to provider.

The amount of money you can release depends on your home’s value. And, to assess how much you could borrow, the equity release provider will ask a surveyor to value your property.

Other factors that may affect how much you can release include:

  • Your age
  • Your partner’s age (if you have a joint application)
  • Your health, medical history and lifestyle (some providers offer larger amounts if you have certain conditions or smoke)

Do you pay tax on equity release?

When you use equity release, you’re taking out a loan on your home and the money you release is also considered a loan. As this money isn’t classed as income, you won’t have to pay tax on it.

But, there may be tax liabilities depending on what you do with that money once you release it. For example, if you use some of the money to gift a large early inheritance to a relative, this could potentially put you over your annual exemption.

Learn more by reading our handy ‘How much money you can give away without being taxed’ and Inheritance Tax guides.

Can I sell my house if I have an equity release plan?

It’s possible to sell your home if you have an equity release plan. If this is something you think you’d like to do in the future, check to see whether it’s an option.

Some providers allow you to move to a ‘suitable alternative property’ and transfer your equity release plan to your new home as long as they’re satisfied they’ll be able to sell it to pay off the loan.

How does equity release work when you die?

The loan against your home and rolled up interest will need to be paid back to the equity release lender when you die. This usually needs to happen within a year after you pass.

Your beneficiaries will need to notify the lender with a copy of your death certificate and probate documentation (if applicable). Your executor(s) will work with your equity release lender on how to repay the loan and interest. The loan and interest are usually repaid through the sale of your home, but many lenders will accept other repayment options.

The pros and cons of equity release

Equity release pros and cons

Equity release can help many retirees boost their retirement incomes. But as with all financial products, it comes with risks and isn’t for everyone. So, what’s the catch with equity release?

To help you weigh your options, let’s explore equity release’s pros and cons.

Equity release pros

  • You can access your home’s equity as tax-free cash (with a lifetime mortgage)
  • You can spend money you release as you wish
  • Equity Release Council’s ‘no negative equity guarantee’ protection with a regulated product
  • There’s no monthly repayments (with some lifetime mortgage products)
  • Flexible options to repay interest (with some lifetime mortgage products)

Equity release cons

  • Interest usually rolls up with a lifetime mortgage and can be expensive
  • Equity release could be more costly than downsizing to a smaller home in the long run
  • Releasing equity reduces the value of your estate
  • There’s a risk that you may not have enough equity to cover care costs if you release too much
  • You may face early repayment charges with some lifetime mortgage products
  • Set up, home valuation, financial advice and solicitor fees add up and can be expensive
  • Releasing equity from your home may impact your eligibility for benefits
  • The interest rates for an equity release loan tend to be higher than rates for standard mortgages

Equity release alternatives

Alternatives to equity release

Equity release is a huge commitment and it’s a decision that can affect your loved ones if you plan to leave an inheritance. But, it’s not the only option you have to increase your retirement income.

Here are a few alternatives to think about:

Downsizing

Moving into a smaller or less expensive home or area could help you pay off your mortgage faster. And as the cost of living rises, downsizing could mean you’ll have lower heating and utility bills. This could help you save more money to pay for care, afford home improvements or afford a better retirement lifestyle.

Remortgaging your home

Many people choose to remortgage when their fixed-term mortgage comes to an end - either to get a better rate or avoid paying a standard variable rate. But, you could also remortgage to release some of your home’s equity too.

Renting a room in your home

Would you consider sharing your home with a tenant to earn extra income? If you’re willing to become a resident landlord, you could earn up to £7,500 tax free each year under the government’s Rent a Room Scheme.

Phase into retirement

If you’re not entirely ready to give up your work life, reducing your hours at work by taking a part-time job could be another alternative to consider. This could be your chance to rediscover a new hobby or interest that you didn’t have time to indulge when you were working full time. For example, if you love nature and the outdoors, you could work for a wildlife charity. Or as a tour guide if you’re a history buff.

Is equity release safe in the UK

Should you avoid any equity release companies?

There are many equity release providers on the market. And, as equity release opens up the opportunity to borrow a large sum of money, it can be a target for scammers. While there's no list of equity release companies to avoid, the FCA and Equity Release Council can help you stay safe. 

The FCA regulates equity release in the UK to help protect consumers from the bad apples that have given it a bad name in the 1980s and 1990s. As the regulator for the UK financial services market, they have strict guidelines and measures in place to ensure you’re protected when you buy products like equity release.

Today, they regulate firms that offer equity release products and the advisors that recommend these products to make sure that you:

  • Get fair treatment and advice
  • Only receive recommendations that suit your individual needs
  • Feel empowered to make an informed decision
  • Understand the risk involved

The FCA also works together with the Equity Release Council. The industry body sets high standards for equity release providers and advisors to follow to help protect consumers.

There are two ways to ensure you’re getting quality advice and products:

  1. Check whether your advisor is on the FCA’s Financial Services Register
  2. Ensure your equity release lender is a member of the Equity Release Council

If the advisor or equity release company you’re considering aren’t on these lists, avoid working with them. Check out our pension and investment scams guide for more tips on protecting your money.

Do I need financial advice before using equity release?

If you’re considering equity release, you must get professional advice from a regulated financial advisor. If you’re speaking to equity release providers or companies who claim you don’t need advice or pressure you to make a decision, you should avoid dealing with them and report them to the FCA.

Taking on a loan against your home or selling a share of your home is a big decision. While it can provide you with a boost of extra income today, it can also reduce the value of your estate tomorrow. Before making a final decision, speak to your loved ones if you think this may affect their inheritance.

Speaking to a financial advisor can help you answer key questions such as:

  • Will equity release affect your eligibility for Pension Credit and other benefits?
  • Do you have other assets and/or investments that can help you boost your retirement income?
  • Is equity release the right decision for your individual circumstances
  • Should you consider alternative retirement income options?
  • Could your loved ones offer help with finances?
  • Do you qualify for grants or schemes to help you finance improvements to make your home more energy-efficient?

Match with a regulated equity release advisor for free

We’d love to help you find quality advice to help you explore your retirement income options by matching you with an expert advisor.

Our free advisor matching service starts with filling out our simple form. Tell us a little about you and your contact details and we’ll find your match. Your equity release expert will then be in touch to arrange your free no-obligation consultation.

Ready to learn more about equity release? Match with your local equity release expert by clicking the button below.
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