Equity release can be useful for some homeowners aged 55+ who want to access money tied up in their home without selling or moving. But it’s not right for everyone. Interest compounds, it reduces what your heirs inherit and it can affect means-tested benefits.
Habito by Monzo is authorised and regulated by the Financial Conduct Authority (FRN 714187). Your home may be repossessed if you do not keep up repayments on your mortgage. This article is for general information only and isn't personal financial advice.
Equity release is a way for homeowners aged 55+ to unlock some value from their property, as a lump sum or in stages, while continuing to live there. The money can fund a range of things such as home improvements or uni fees. There are 2 types: lifetime mortgages and home reversion plans. With both, you stay living in the property until you die or move into care.
The most common type is a lifetime mortgage (LTM), where you get a loan that’s secured on your home and the interest is usually compounded - “rolled up”. That means it’s added to the loan and you don’t make any payments (although there are some deals that allow this). The loan and the interest are repaid when you die or go into care and your property gets sold.
A lifetime mortgage can provide a lump sum or you can get a “drawdown” version allowing you to access smaller amounts over time, when you need them.
If you choose a deal that complies with standards set by the Equity Release Council (ERC), an industry body, it will have a “no negative equity guarantee”. That means you’ll never have to pay more than the value of the property when it’s sold, even if that’s less than your debt. Find out more in our guide to how lifetime mortgages work.
With the other type, home reversion plans, you sell all or part of your home, at below the market value, to the plan provider. You keep the right to carry on living there rent-free for the rest of your life.
You have to use a qualified financial adviser to get equity release. This is to ensure you get good advice as it’s such a major decision, you’ll need to take specialist financial advice before taking out equity release. Advice and other fees may apply, so check these with your adviser and provider.
Equity release isn’t the only way to access the value in your home - for example, some people do this through downsizing. But it does mean you can stay put.
This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration
We’ve listed the main benefits of equity release below.
Some of the disadvantages of equity release are below.
This is an illustrative example only. Actual interest rates and the amount owed will depend on the plan and how long it runs.
This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.
The main catch is compound interest. Not making monthly repayments means the interest is added to the balance each month, and then you’re paying interest on your interest as well as on the loan itself. Over around 11 years at 6.5%, for example, the debt will double.
Other catches include the fact you have to pay for financial advice. Early repayment charges can apply if you repay some or all of a lifetime mortgage early, depending on the terms of the plan.
There are also likely to be terms in the contract that mean you have to keep the property in a good state of repair and can’t sub-let it. Breaching the terms could ultimately lead to the lender repossessing your home, but this is rare.
Yes, in most cases you can repay a lifetime mortgage but they’re not designed for this.
Some lifetime mortgages allow you to make voluntary repayments without an early repayment charge, subject to the plan’s limits and terms.
Paying back the whole loan early is also possible but it may trigger a hefty early repayment charge (ERC). On the death of the last remaining borrower or when they move into care, the loan is repaid from the sale of the property.
It’s possible to move house if you have equity release but if you sell your home, you’ll need to deal with the loan. You can repay the current loan and interest (probably with an early repayment charge) and get a new loan. Or you can transfer your existing loan to a new home, called “porting” the loan. If the new property’s cheaper, you may have to repay some of the loan.
Some deals come with a “downsizing protection” feature. This means that if you decide to move, you can usually take your lifetime mortgage with you as long as the lender is happy that the new place meets its criteria. If it doesn’t, you may be able to repay the mortgage in full without an early repayment charge (ERC).
If you get a new loan or transfer it, there may be fees, such as for valuation and arrangement.
Most equity release products are only for people aged at least 55.
Anyone considering equity release must speak with a qualified financial adviser as everyone’s circumstances are different. But here are some scenarios where it might be worth considering equity release if you’ve already considered the alternatives.
Below are some scenarios where equity release might not suit you.
Opting for equity release has major implications for your finances. Critics of it often highlight the following:
In the 1980s and 1990s, the equity release industry suffered from mis-selling scandals. These days, the rules and protections are much better but it’s still possible for mis-selling to happen. It could happen if, for example, you were sold a lifetime mortgage when this wasn’t suitable for you.
We’ve lined up equity release against some common alternative options in the summary table below and then explained them further.
Many people opt for downsizing – moving to a smaller property – in their 50s and 60s to unlock equity, if the kids have left home so there’s less need for extra bedrooms. Generally, this leaves you pocketing the difference between the sale price of the larger property and the cost of the new, smaller one.
A retirement interest-only mortgage (RIO) works like a regular interest-only loan, but with no fixed end date. Find out more in our retirement interest-only mortgage guide.
There’s an option to release equity through a standard remortgage of your property. You’ll be repaying the capital as well as the interest through monthly payments. More on this in our full guide to remortgaging to release equity. You can find out more about standard remortgaging in our remortgaging guide.
The government’s Rent a Room scheme allows you to rent out furnished accommodation in your home and earn up to £7,500 a year tax-free (that threshold is halved if you share the income with someone else). You can let out as much of your home as you want.
Checking what benefits you qualify for in your 50s and 60s is a sensible move whether or not you’re thinking about equity release. And it’s worth checking what local councils may offer in terms of grants for adapting your home.
To get equity release, you have to use a qualified financial adviser and you must be given a clear illustration of the costs involved. Lifetime mortgages and home reversion plans are regulated by the Financial Conduct Authority (FCA), and you’ll need specialist advice before taking one out.
Choosing a provider that’s accredited by the Equity Release Council (ERC) gives you extra safeguards including a “no negative equity guarantee”. So when the property’s sold, even if there’s not enough money from the sale to pay off the loan, you don’t have to make up the difference. For example, let’s say your home was sold for £150,000 but you owed £160,000 on the lifetime mortgage. The lender would have to write off the £10,000 of extra debt.
ERC-approved products also give you the right to stay in your home for the rest of your life or until you move into care, and the right to transfer your plan to another suitable home without a penalty, if the property meets the lender’s rules.
To explore your remortgaging options, you could start by having a chat with one of our friendly mortgage experts for free. They can help you see what deals you could be eligible for. They can’t advise on equity release but you can find qualified advisers on the ERC website.
*Options available to you will depend on lender criteria, affordability and your personal circumstances. *
*Your home may be repossessed if you do not keep up repayments on your mortgage. *
Habito by Monzo is a mortgage broker, not a lender. We’re authorised and regulated by the Financial Conduct Authority (FRN 714187). This content is intended for general guidance and is not a substitute for personalised mortgage advice.
The money you access from your property through equity release counts as capital – in other words, it counts as your savings – when it comes to means-tested benefit assessments. Money released from your home may count as capital for means-tested benefits and could reduce or stop some benefits, depending on your circumstances and the benefit involved. Check how equity release could affect your entitlement before proceeding..
Taking smaller amounts through a drawdown plan may affect means-tested benefits differently from taking a single lump sum, but this depends on your circumstances. Check with a specialist adviser or the organisation that manages your benefits before making a decision.
This article is based on guidance from organisations such as MoneyHelper, Citizens Advice and GOV.UK. Mortgage rules and legal processes can change, so it's worth checking the latest information or speaking to a qualified adviser.
Information is correct at the time of writing and may change. Always check the latest terms and conditions before taking out a policy.
This article is for general information only and isn't personal financial advice.
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Lifetime mortgages explained: how they work, who can apply, what they cost, and how they affect inheritance. A UK guide.
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