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Equity release mortgages explained

Everything you ever wanted to know about equity release mortgages

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What is equity release? Read our in-depth guide.


We receive plenty of enquiries from homeowners who want to know more about equity release mortgages  (also known as lifetime mortgages),  what the eligibility criteria is, and the process involved in releasing equity from a property you own.

If you’re one of these people, even if you’ve been declined an equity release mortgage, you’ve come to the right place. Read on where we’ll be discussing how home equity release works in the UK and much more.

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What is an equity release mortgage and how does it work?

Customers often get in touch to ask us things like “what is equity release?” and “how does equity release work?” so we’ll start by covering the basics…


Equity release definition

Equity release can be defined as “a range of products which allow you to access and release the equity (cash) tied up in an asset”.


Equity release mortgage schemes explained

So, how exactly do equity release schemes work when it comes to mortgages? Essentially, they allow you to borrow money from an asset you own – in this case, your house.

You have the option to either release equity as a lump sum, in several smaller amounts or cash, or a combination of both.


Equity release: How does it work?

There are two primary equity release options, and which one you opt for will dictate the mortgage terms and how you repay the equity release loan on your mortgage.


Lifetime mortgage

As it stands in 2019, the most popular home equity release scheme is the lifetime mortgage, which is essentially a long-term loan secured against your property. With a lifetime mortgage, you retain full ownership of your home. There are several different variations of the lifetime mortgage:

Roll-up lifetime mortgage

Lets you withdraw a lump sum of money which you are not required to make any monthly repayments on. Instead, interest will be accrued over time on the amount released. Both the interest and lump sum will be paid off when you (and your partner, if a joint  application) pass away or move into full-time care.

Drawdown lifetime mortgage

Similar to a a roll-up lifetime mortgage, drawdowns allow you to release money more flexibly, as and when required, rather than in a lump sum. Interest won’t accrue on the money in your reserve until released, which helps reduce the amount of interest charged.

Flexible lifetime mortgage

As with the roll-up scheme, you will receive a cash lump sum. Flexible lifetime mortgage plans give you the option to make voluntary payments to bring down your mortgage loan amount, without incurring early repayment charges.

Enhanced lifetime mortgage

This type of equity release mortgage is only suitable for those with particular medical conditions. They allow you to unlock a larger amount of equity from your home compared to other schemes, and may also give you better rates.

Interest-only lifetime mortgage

Rather than accruing interest, this type of scheme allows you to pay off a certain amount of interest every month. This way, you have control over how much interest needs to be repaid when your home is sold.

Speak to a whole of market broker about equity release today.


Home reversion

Home reversion is a less common way to release equity from your house. It involves selling all or part of your home in return for a lump sum, regular income, or both, meaning you become a co-owner of your house.

Going down this route means you usually only end up receiving around 20 – 60% of the property’s market value, so it can be an expensive option. On the other hand, it means you are able to release cash and continue living in your home rent-free.

When your home is sold, the reversion company receives their share of the proceeds (so, for example, if you sell 50% of your house they would receive half the proceeds), and the remaining 50% would go towards your inheritance.


Other home reversion eligibility considerations

In agreeing to a home reversion you become a co-owner of the property. When you give up a share of your home you’re exchanging for a reduced sum based on its current value, and the proceeds, when sold, may be worth considerably more.

While not a requirement, home reversions are best suited to those over 70 as providers tend to ask for a larger equity share from younger borrowers. The older you are, the higher percentage you’re likely to get of your home’s market value.


Why should I consider equity release and am I eligible?

Equity release schemes are specifically aimed at older people and as such, there are minimum age requirements. For a lifetime mortgage, you (or both of you, if joint borrowing), need to be at least 55 years old. For a home reversion plan you (or both of you) need to be at least 65.

The amount of cash you can release varies not only by lender, but will depend on other factors such as age, health status, and the value of your home.

Many lifetime mortgage lenders or home reversion specialists will have a minimum value they accept for equity release, and will always want to carry out a property valuation to confirm.


Other lifetime mortgage eligibility considerations

If you take out a lifetime mortgage, many lenders have minimum amounts you can release. There is no set figure, but once again this will vary by lender, your age, and of course the value of your home.

However much you borrow, remember that you will be required to pay back the loan plus any interest owed at the end of the period, which could affect your tax position and the amount of inheritance you have.


How to release equity from your home

The equity release application process

  1. Browse our website and consider whether equity release is a suitable option.
  2. Contact us and we’ll refer you to one of the equity release experts we work with who will advise you on the best scheme for your circumstances.
  3. The team will draw up an initial plan outlining how much you want to borrow and the costs involved.
  4. When agreed, the team will prepare a financial planning report and relevant documentation.
  5. You will work with an advisor who will guide you through the application, and submit it to the lender on your behalf.
  6. The advisor will liaise with your solicitor and a valuation will be carried out on your property by the lender.
  7. Upon a successful valuation, an offer will be made and your solicitor will begin the legal paperwork.
  8. Your solicitor will set a completion date and arrange for you to claim your equity release funds.

How much does equity release cost?

When it comes to equity release setup costs, it is very much dependant on which provider you go with so it’s difficult to give a set figure.

However, you should expect to be charged for a financial advisor and the mortgage provider’s administration and application fees. There may also be solicitors’ fees, as well as a charge for a surveyor to value your property.

In terms of interest rates, the average for lifetime mortgages products are, at the time of writing, usually between 5% – 6%.

How much interest you incur at the end of your lifetime mortgage will all depend on what scheme you choose, and how long it runs for (bear in mind that lifetime mortgage terms are not fixed – they only end when your home is sold).


How long does equity release take?

For lifetime mortgage schemes, expect a time-frame of around 8 weeks before being able to access your funds. Home reversion typically takes slightly longer, approximately 10 – 12 weeks before the equity release process is complete.


Can I lose my home by taking out a lifetime mortgage?

No. You home is secure until you die or have to go into care. You are entitled to live in your home for as long as you live. If you have a partner, then if one of you dies or goes into care, the surviving partner can remain in the home.


Other factors that can impact your equity release application

There are a number of other factors that can impact on an equity release application, and they include….


Equity release and health status

As well as age, the state of your health can also play a considerable factor on how much you can borrow and what rates you’re offered. Generally, the younger you are and the better your health, the less equity you will be able to release.

This is because lifetime mortgages are based on life expectancy; if a person lives much longer than expected, there is a risk that the original advance plus interest could exceed the value of their home. Lenders do not want to make a loss.


Equity release and bad credit history

Although equity release plans don’t usually involve any monthly repayments, some providers will carry out credit checks. From a lender’s point of view, if a borrower has a history of adverse credit it could suggest that they may be more likely to be negligent when it comes to looking after their property.

However, there would usually have to be particularly severe instances of adverse to be declined an application based on this alone. Many equity release mortgage providers will accept things like missed payments and defaults, and even more serious issues such as CCJs, on a borrower’s credit file (unless particularly severe or recent).

Visit our bad credit section to read more on how adverse credit can affect mortgage applications, or contact us directly for advice.

Can I take equity release if I have an IVA?

The rules regarding equity release and IVAs vary from lender to lender, but most mainstream mortgage providers would be wary of a borrower with this type of adverse on their file, as it’s generally considered one of the more severe forms.

A specialist bad credit mortgage provider would be required for equity release if you have an IVA, and their lending decision might depend on how long you’ve had this type of adverse. For example, your equity release application is more likely to be accepted in the 4th year of an IVA than it would be in the first.

Make an enquiry to speak with a specialist bad credit advisor for more information.


More information on Equity Release – FAQ

We receive so many queries relating to equity release, it’s difficult to cover everything in one article.

Here are some of the most frequently asked questions on the topic to give you all the information you need. Alternatively, get in touch and we can refer you an expert for help.


What are my obligation if I take up equity release?

While you have a choice on whether to make any payments toward the interest, there are a number of things that are mandatory.

These include:

  • The property must be insured
  • It must be maintained
  • The property must not be left vacant
  • It should not be rented out

Can I move house if I have equity release?

Yes, if you’re already in an equity release plan you may be able to ‘port’ it with you after selling your current house. The value of the new property must be worth enough so that the provider is happy to lend the same amount against it. If not, you may have to repay some of what you’ve borrowed early.


Do I pay tax on equity release?

While the equity you release from your home is tax-free, there may be implications depending on what you intend to use it for.

For example, if you decide to put the money into a savings account or make an investment, tax may then be payable on any interest, income or gains you receive.

There are a number of ways to save or invest your equity release funds if you don’t wish to spend them immediately, including placing the funds in a personal savings account or an ISA to take advantage of a tax-free allowance facility.

Moreover, there are other tax implications of equity release to consider, such as the potential to minimise your inheritance tax liability when you die (as a result of your estate decreasing in value). Although your beneficiaries might be inheriting less via your assets, it may be the case that you can pass on secure pension savings outside of your estate if you’ve taken equity release during retirement.

For more information about the tax implications of equity release, make an enquiry to speak with a specialist advisor.


Do I need a lasting power of attorney (LAP) for equity release?

Most lenders will recommend that you have a lasting power of attorney (LAP) in place if you’re taking equity release, in some might even insist on it.

A LAP is a legal document which allows you to nominate one or more people you trust to make decisions on your behalf if there ever comes a time when you’re unable to, due to ill health or the decline of your mental capacity.


How does equity release affect benefits?

If you’re on means-tested benefits such as pension credit, savings credit or council tax benefit, an increase in your savings as a result of equity release can affect these benefits.

There are limits as to how much you can retain in savings before you start to lose your benefits. Fill out an enquiry to discuss this further.


Can I use equity release to buy a property overseas?

Yes, there are some lenders who will let you release equity from your home to buy an overseas property and many that won’t. There are rules which dictate how long you must reside in your UK home – it is not possible to fund a complete move abroad, but you can use a lifetime mortgage to buy an overseas home that you visit regularly.


Can I use equity release to buy a second home?

Yes, releasing equity via a lifetime mortgage in an existing property is a common alternative to remortgaging if you’re looking to invest in a second home.


Can I get equity release on more than one property?

Yes, it is possible to use equity release on a buy-to-let investment or a second home of holiday home. However, it may make more financial sense to sell the second property rather than using equity release. Speak to an expert for more information on this.


How does equity release compare to downsizing?

Downsizing is a good way to release money debt-free while ensuring you retain homeownership, meaning you can pass it on as inheritance. However, there are costs associated with selling your house, such as valuation, estate agent and legal fees to consider, which may take a large chunk out of any profit you earn.

What’s more, a decision to move can be emotional as well as financial. A big benefit of equity release is that you can stay in your own home without the hassle of uprooting – something many older people especially will want to avoid.


Can I use equity release on a shared ownership property?

Unfortunately you cannot get a lifetime mortgage on a shared property, but other options might be available. Make an enquiry to find out what they are.


Can I get equity release if I have a lodger?

Yes, some lenders will allow you to release equity on your property if you have a lodger or even a tenant, but it’s important to speak to an equity release specialist to find out which lenders will accept equity release under these circumstances. Fill out an enquiry form via our website to be put in touch with one.


Can I get out of an equity release plan?

Yes, it is possible to get out of an equity release plan – but it can be very costly. Many lenders impose early repayment charges, while others may levy these charges in different ways.

Receiving a lump sum from an unexpected windfall such as an inheritance could be utilised to help pay off an equity release loan. Downsizing is another possibility.


Can I sell my house if I have taken equity release?

Yes, it may be possible. In the majority of cases, the borrower would be granted permission to transfer their equity release debt to another property.

This would be at the lender’s discretion, though, and they will need to be confident that the property you’re moving to offers sufficient security to safeguard the loan.


Why you should speak to an equity release mortgage broker

OMA offers a 5-star service with access to expert brokers who are:

  • Whole of market.
  • Already know the lenders to go to as they successfully arrange these already.
  • OMA Accredited advisors.
  • LIBF Training course.

Speak to an mortgage equity release expert today

If you like what you’re reading or you’d like to know more, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We don’t charge a fee, and there’s no obligation or marks on your credit rating.

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.