What Is Equity Release and How Does It Work?

For many homeowners, the value tied up in their property represents the largest single asset they hold. Equity release is a way of accessing some of that value without having to move home or make monthly repayments, but it is a significant financial decision and it will not be right for everyone.

This guide explains what equity release is, how it works, the main types available, the considerations to weigh up and the alternatives worth considering. It is for general information only and is not personal advice. Specialist advice is required before proceeding.

What is equity release?

Equity release allows homeowners, usually aged 55 and over, to release money from the value of their property while continuing to live there. The amount you can release depends on your age, the value of your home and the type of plan you choose.

In the UK, equity release generally refers to lifetime mortgages. A lifetime mortgage is a loan secured against your home. You retain full ownership of the property and the loan, along with any interest, is usually repaid when you pass away or move into long-term care. You can read more in our Lifetime Mortgages Explained guide and our wider overview of later life lending.

How does equity release work?

With a typical lifetime mortgage, you borrow a lump sum, or sometimes smaller amounts over time, secured against your home. There are usually no monthly repayments to make. Instead, interest is added to the loan and compounds over time, meaning you are charged interest on the original loan amount plus the interest already added.

Because the interest rolls up, the amount you owe grows over the years. This reduces the equity left in your property and the inheritance you can leave to your family. The loan is eventually repaid, usually from the sale of your home, when you die or move into long-term care.

Some modern lifetime mortgages allow optional voluntary interest payments, which can help manage the size of the loan and protect more of your inheritance for your family.

The main types of equity release and later life lending

Lifetime mortgages

The most common form of equity release. You release a tax-free lump sum (or drawdown) secured against your home, with no mandatory monthly repayments. Interest rolls up and the loan is repaid when the property is sold, usually on death or moving into care. Most plans include a ‘no negative equity’ guarantee, so you will never owe more than your home is worth.

Retirement interest-only (RIO) mortgages

A RIO mortgage lets you borrow against your home and pay the interest each month, keeping the loan balance stable. The capital is repaid when you sell the property, move into long-term care or pass away. RIO mortgages can be suitable if you have enough income to cover the interest payments.

Later life residential mortgages

Some mainstream lenders offer mortgages with no upper age limit, assessed on income and affordability. These work more like a traditional mortgage, with monthly capital and interest repayments, and may be an alternative worth considering.

What can the money be used for?

Common reasons people consider equity release include:

• Repaying an existing mortgage
• Funding home improvements or adaptations
• Gifting money to family, for example to help children onto the property ladder
• Supplementing retirement income
• Creating a financial buffer for later life

There is no requirement to spend the money in a particular way, but it is important to think carefully about whether releasing equity is the most suitable option for what you want to achieve.

The considerations and disadvantages

Equity release is not suitable for everyone, and the potential disadvantages should be understood clearly before any decision is made.

• It is a loan secured against your home. A lifetime mortgage is a loan secured against your property, and the amount you owe grows over time.
• Interest rolls up and compounds. Because interest is added to the loan and compounds, the debt can increase quickly.
• It can reduce your estate and inheritance. Releasing equity will reduce the value of your estate and the amount you can leave to your family.
• It may affect means-tested benefits. Receiving money through equity release could affect your entitlement to means-tested benefits such as Pension Credit or help with care costs.
• Early repayment charges may apply. If you repay the loan early, for example because you sell your home, there could be a substantial early repayment charge.

Alternatives to equity release

Equity release is only one possible option, and alternatives should always be considered. These might include:

• Downsizing to a smaller property and using the surplus funds
• Using existing savings or investments
• Borrowing through a standard or later life residential mortgage
• A retirement interest-only mortgage
• Government support or grants for home adaptations

A specialist adviser will help you compare these options against equity release so you can decide what feels right for your circumstances. Our guide to whether equity release is right for you may help.

Is equity release right for me?

Suitability depends on your individual circumstances, including your age, the value of your home, your income, your reasons for releasing equity and the impact on your family and benefits. Because it is a lifelong commitment, it is vital to take specialist advice before proceeding.

Based in Swansea, we offer face-to-face, telephone and video appointments to clients across South Wales and the UK. We encourage family involvement and will take all the time needed to make sure you understand your options. You can also explore our frequently asked questions or read more about equity release advice in Swansea.

This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration. Equity release may reduce the value of your estate and may affect your entitlement to means-tested benefits. Our equity release advice relates to Lifetime mortgages only.

A lifetime mortgage is a loan secured against your property. The information in this guide is for general information only and is not personal advice. Suitability depends on your individual circumstances, and specialist advice is required before proceeding.

As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.