Equity Release and The Alternatives

We’ll walk you through equity release and the alternatives available, outlining the pros and cons of each.

This is our main guide. For all our content on this topic, which may include an article about your specific circumstances, visit our dedicated equity release mortgages page.

What is an equity release mortgage?

Equity release mortgages allow homeowners aged 55 and older to access and release the cash tied up in their property. They allow you to borrow against the value of your home, leveraging the equity you’ve built through mortgage repayments or property appreciation.

The most popular type of equity release is known as a lifetime mortgage.

How does it work?

You would borrow against the equity you’ve built up in your home through a loan secured against the property.

You will retain ownership of the property, although interest will accrue over the term. The debt and interest are typically repaid when you pass away or move into long-term care. In most cases, the loan is settled through the sale of the property.

However, it’s important to note that you can pay off equity release early, but different lenders have their own rules.

If you’re considering equity release and would like to explore your options, contact us for expert advice. Our retirement mortgage specialists can explain these products in detail and help you decide on the best course of action based on your needs and circumstances.

Benefits and considerations

There are considerations with Equity Release you should think about:

Benefits

• You’ll receive a tax-free cash lump sum. There is no income tax, capital gains tax, or any other tax due on the cash you receive.
• You can continue to live in your home. Your right to remain in your home is protected as long as your lender is a member of the Equity Release Council.
• You won’t pass on debt to your loved ones.
• In certain cases, lenders will allow you to proportion a percentage of your home’s value to be passed on to your loved ones. However, this might mean that you get less cash to spend.

Considerations

• Your loved ones will inherit less. Once your home is sold and the loan amount, interest, and fees are paid, they may not inherit much.
• The lifetime mortgage is repaid when the last one of you either passes away or moves into long-term care. At that point, the loan would need to be settled—usually by selling your home. However, your sons or daughters could repay the amount owed using other funds if they prefer to keep the property in the family, though this may not always be possible.
• While there are some costs involved in taking out a lifetime mortgage, these can either be paid by you or covered using the funds released from your equity. Some lenders charge a valuation fee or lender fee, but many now offer free valuations, meaning you often don’t face any upfront costs at all.
• It’s also worth noting that if you repay the loan during your lifetime and exit the equity release agreement, you may incur an early repayment charge.
• It will be difficult to remortgage. Choosing equity release now will result in a charge on your property. If you later decide to raise capital against your home in another way, such as remortgaging, it will be difficult to do so.

How much equity release will you qualify for?

Most equity release providers typically cap the amount they offer at between 20% and 50% of your property’s market value, although some may go higher or lower depending on your circumstances.

They will calculate your eligible amount based on the following factors…

• Your age: The older you are, the more equity you can usually release.
• Your health: People with serious health issues may be able to release more equity. There are over 100 conditions that qualify, so speak to an expert for a full list.
• Your property: What your home is worth is a key factor here, as providers base the loan amount on its market value. The property type might also be a factor, as people with non-standard construction homes won’t qualify for equity release.

Alternatives

There are several alternative options available instead of releasing equity:

Retirement interest-only mortgage

Commonly known as an RIO mortgage, this product is similar to an equity release lifetime mortgage, but with a key difference. You can borrow a lump sum and make monthly repayments to cover the interest while the capital remains unchanged for the duration of the loan.

Remortgage to release equity

In many cases, a straightforward remortgage could be more cost-effective than equity release in the long run, as interest rates are typically lower and you repay both interest and capital over the loan term.

However, some lenders will insist you are employed or place an age cap on the remortgage, so borrowing into retirement can limit your choice of lenders. Some providers apply no upper age limit to their mortgages, but if the loan will take you into retirement, they will often need to see further proof of income.

The equity you have built up over the years will often mean your loan-to-value (LTV) is quite low. You can benefit from preferential interest rates by finding a provider specialising in later-life lending.

Downsizing

If you have paid off your mortgage on your main residence and are happy to move to a smaller property, perhaps in a cheaper area, this could be a viable option. The proceeds from the sale are tax-free and can be used for any purpose. Moving to a smaller property can reduce your council tax and household bills.

You would need to calculate the expenses of moving house, such as legal fees, estate agent fees, moving costs, and possibly stamp duty. These could reduce the amount you receive from the sale. However, if you live in your new home for many years, those costs could be offset by its increasing value.

Secured loans

Secured loans are generally quicker and easier to apply for than mortgages. However, they still require due diligence, and each lender’s approval process varies.

They are secured by a second charge on your property, resulting in lower rates than unsecured loans, though they are typically higher than mortgage rates.

However, a secured loan over 10 years could still be cheaper overall than taking out a mortgage over a longer term and into retirement. For smaller amounts, a secured loan may be your preferred option.

Secure loan providers usually impose age and affordability restrictions, as with a standard mortgage. Although there is no official maximum age for taking out a secured loan, lenders are obliged to lend responsibly.

Each has its own eligibility criteria. Many lenders set an age cap of 65, but some don’t specify an age limit and assess each application on its own merits.

Personal loans

A personal loan is not secured against your property, so the interest rate will be higher. You’ll need to be employed and pass an affordability check regardless of any equity in your home.

The maximum personal loan amount with most mainstream lenders is typically £25,000, although rates with other lenders can be higher.

Take in a lodger

The government’s Rent a Room Scheme allows you to let out one or more furnished rooms in your house and earn up to £7,500 per year tax-free.

This is not for everyone, but if you have space and are willing to take in a lodger, it can be a lucrative arrangement that doesn’t require using your equity or savings.

If you’re considering this option, you may want to test it out on platforms like Airbnb before making a long-term commitment.

Refinance an investment property

If you have other properties, you could look to raise funds from them in several ways:

• Sell it
• Rent it out
• Borrow against the rental property rather than your primary home

One of our mortgage brokers can advise you in more detail, as not everything is as straightforward as it might seem, and it’s important to discuss the options in more detail suited to your circumstances.

Home reversion plans

Taking out one of these products involves selling all or a portion of your home to a home reversion provider, usually at 20-60% of its market value, in exchange for a lump sum or monthly instalments.

You would become a co-owner of the property, but you won’t need to pay any rent on the percentage of your home that no longer belongs to you. When the property is eventually sold, the reversion company recoups its share of the proceeds.

The home reversion market in the UK is much smaller than the interest-only mortgage sector. Most retirement experts do not recommend these products because you’d have to give up your stake in a major asset and settle for less than the market value of your home.

Which one should you choose?

The answer depends on your circumstances and preferences. Before making your decision, you should discuss all options with an equity release advisor.

Downsizing or taking in a lodger will usually have the greatest impact on your day-to-day life. In contrast, RIO mortgages and equity release will arguably have the most effect on the inheritance you can leave.

The amount you need to borrow, how it will be used, and how quickly you need it will also influence your decision. Suppose you need cash quickly to take advantage of an investment opportunity. In that case, time is not on your side, and the quickest method may be preferable to the cheapest.

On the other hand, if borrowing for home improvements or a dream holiday, you will normally have time to consider all eventualities and set your own timeline.

Fortunately, you cannot take out an equity release product without consulting a qualified advisor. This ensures you fully consider the decision before moving forward. However, not all specialists can advise on every alternative, so we recommend speaking with a specialist mortgage broker to assess your options comprehensively.

How to release equity from your home

If you think releasing equity is something you want to consider, here is a 3-step process we recommend:

• Seek professional advice: You should never do equity release lightly, so it’s important to seek impartial advice from a later-life lending specialist before you begin. Make an enquiry with us, and talk to an equity release expert for a free, no-obligation chat about your needs and circumstances.
• Complete your application form: Your equity release advisor will work closely with you on your application, offering bespoke advice along the way, before submitting it to the equity release provider. At this stage, you will need to provide documents for proof of address and proof of identification.
• Valuation and legal, due diligence: Your advisor will liaise with your solicitor (they will recommend one if you don’t want to appoint one yourself), and a valuation will be carried out on your property, arranged by the lender subject to a successful valuation, an offer will be made, and your solicitor will begin the legal paperwork.

After completing these three steps, your solicitor will set a completion date and arrange for you to claim your equity release funds.

How long will the process take?

You should expect to access your funds within eight weeks. However, home reversion plans typically take slightly longer, approximately 10 to 12 weeks, before the equity release process is complete.

Eligibility criteria

To qualify for equity release, you must own your home and be over 55 (or over 65 for a home reversion plan).

While many providers prefer that you have paid off your mortgage and hold full equity in the property, it’s not strictly necessary. If you have existing mortgage debt, the balance must be settled as part of the equity release agreement, typically using the released funds.

While it’s possible to release equity with existing mortgage debt, the outstanding balance on your mortgage must be settled as part of the agreement. The balance would usually be paid off using the released equity, and any remaining money would be deposited into your bank account.

If it’s a joint application, you and your partner must be at least 55.

How much equity release will you qualify for?

Most equity release providers cap their offer at between 20% and 50% of the property’s market value. Some go higher than this, and others lower it.

They will calculate the exact amount you’re eligible for based on the following factors…

• Your age: The older you are, the more equity you can usually release
• Your health: People with serious health issues may be able to release more equity. There are over 100 qualifying conditions, so consult an expert for a complete list
• Your property: What your home is worth is a key factor here, as providers will base the loan amount on its market value. The property type might also be a factor, as people with non-standard construction homes won’t qualify for equity release

Minimum equity release amounts

Some lenders will only approve an equity release application if the deal is worth a certain amount. No set limit applies across the board, but at most providers, it’s between £10,000 and £15,000, although more prestigious schemes can set it as high as £100,000.

The value of your home is also a key factor, with most equity release providers requiring a minimum property valuation of £70,000 to consider your application.

To find out how much equity release you may be eligible for, you can use our calculator below:

Can you get out of an equity release plan?

Yes. Exiting an equity release plan is possible, but it can be costly. Many lenders impose early repayment charges, while others may levy these charges differently. It’s important to check the terms of your agreement beforehand to understand whether any charges apply.

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

Speak to a later-life lending specialist

Equity release is a significant financial decision, but with the right advice, you can make an informed choice that aligns with your goals. Speak to a specialist today to explore your options and take the next step toward achieving financial freedom in later life.

We have advisors on our team who are fully trained in advising on equity release products. Your later-life lending specialist will conduct a thorough assessment of your financial circumstances and discuss your plans before exploring all possible borrowing options. This will ensure you make a fully informed decision.

Call today on 0330 818 7026 or enquire online to arrange a free, no-obligation chat.