What is Equity Release and how does it work?

IF YOU'RE a homeowner and want to enhance your finances, equity release may be an option. You can spend some of your property’s value while still living there – but you’ll need to be 55 or over to apply.

What is equity release?

To put it simply, equity release is the process of accessing some of the money tied up in your home without having to move.

In order to do this, you need to be a homeowner and aged 55 or above. You can choose to release the money as either a lump sum or smaller chunks over time, both of which are tax-free.

There are plenty of reasons you might want to . According to equity release broker Age Partnership, in 2023 over 28% of people choose equity release to make home improvements, while almost 25% repaid their existing mortgage, which is a requirement of equity release.

How does equity release work?

Essentially, you can unlock cash from your home through equity release without the need to move home. The money you release, plus accrued interest, would be repaid when you pass away or move into long-term care. Whatever is left is passed on to your beneficiaries, but there will be less for your loved ones to inherit if you take equity release. Whether you qualify for equity release, the amount of money you can access and the interest rate you’ll pay all depend on your personal circumstances, such as age and health, and the value of your property.

What are the different types of equity release?

There are two main types of equity release - a lifetime mortgage and a home reversion plan:

1. Lifetime Mortgage

A Lifetime Mortgage is the most popular . It allows you to take out a loan which is secured against your property in return for a cash lump sum or a regular income, whilst allowing you to continue owning 100 per cent of your home. The loan is secured against your property and will reduce the value of your estate and impact funding long-term care. If you decide to sell and move property before then, you may be able to take the lifetime mortgage with you, depending on if your new property meets the lender’s criteria, or you can settle the debt. However, you may have to watch out for any early-repayment charges. There are lifetime mortgage plans available for a wide range of personal situations. You can choose to take the money you release as a lump sum, or access smaller amounts as and when you need it, this will keep the cost of borrowing lower. Interest is rolled up from the point you take the loan, as there are no requirements to make repayments, and any unpaid interest will be added to the loan amount. There are plans that allow you to make voluntary payments on the loan subject to certain limits, as repayments can help to offset the roll up of interest. Early repayment charges may apply above a set value.

All lifetime mortgages that meet the Equity Release Council (ERC) standards come with a no negative equity guarantee, which means your estate will never owe more than your property is worth when it is sold.

This means you won’t pass on any debt to your loved ones. You may also choose to protect a proportion of your property value to pass on as an inheritance for your family. This is something you can discuss with an equity release advisor.