Equity Release and the Alternatives

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Home Equity Release Mortgages Equity Release And The Alternatives
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Jon Nixon

Reviewer: Jon Nixon

Director of Distribution

Updated: March 18, 2024

How we reviewed this article:

Our experts continuously monitor changes in the financial space and work closely with qualified mortgage advisors for factual verification.

March 18, 2024

We’ll go through Equity Release and the different alternatives available to show you what the pros and cons are for each

What is an equity release mortgage?

Equity release mortgages allow homeowners over 55 to access and release the cash that’s tied up in their property. Taking out equity release essentially means borrowing the equity you’ve built up in your home through paying off your mortgage. You can release it as a cash lump sum, small instalments or a combination of both.

The most popular type of equity release is a product called a lifetime mortgage.

How does it work?

You would be borrowing the equity you’ve amassed in your home through a loan secured against the property itself.

You will retain ownership of the property and, although interest will accrue during the course of the term, the debt plus the interest is usually only repayable when you die or move into long-term care. The loan is typically settled through the sale of the property.

If you want to talk to someone about whether it might be an option for you, get in touch. The retirement mortgage specialists we work with can explain these products in detail and help you decide whether it’s the best course of action, based on your needs and circumstances.

To qualify for equity release, you must be over the age of 55 (or over 65 for a home reversion plan) and own your own home. Most providers prefer you to have paid off your mortgage and hold 100% equity in the property.

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

If it’s a joint application, both you and your partner will need to be at least 55.

How much equity release will you qualify for?

Most equity release providers will cap the amount they will offer at somewhere between 20% and 50% of the property’s market value. Some go higher than this and others lower.

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 conditions which 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 a RIO mortgage, this is like an equity release lifetime mortgage but with a key difference. You can borrow a lump sum and make monthly repayments to cover the interest. Your capital amount remains unchanged no matter how long the loan runs. Interest-only repayments make the loan more affordable and avoid compounded interest being added when the loan is settled. Assuming your property has increased in value by the time it is sold, you could still leave a healthy inheritance. 

Remortgage to release equity

In many cases, a straightforward remortgage will be cheaper than equity release in the long run as rates are lower and you repay the interest and capital over the term of the loan. You might be surprised how much equity is in your property.

However, some lenders will insist you are in employment 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.

With that said, the equity you have built up over the years will often mean your loan-to-value (LTV) is quite low and you can benefit from preferential interest rates by finding a provider that specialises 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 money you raise from the sale is tax-free and can be used for any purpose. Moving to a smaller property can also 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, all of which 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 value increasing.

Secured loans

Secured loans are generally quicker and easier to apply for than a mortgage. The loan is secured against your property through a second charge so rates are lower than you would pay on an unsecured loan – but typically higher than for a mortgage. However, a secured loan over, say 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.

In most cases, secure loan providers impose age and affordability restrictions as they would for a standard mortgage. There is no official maximum age for taking out a secured loan but lenders are obliged to lend responsibly and each has their own eligibility criteria. Lots have an age cap of 65 but some lenders don’t specify any age limit and assess each application on its own merits.

Personal loans

A personal loan will not be secured against your property so rates will be higher. You’ll need to be in employment and pass an affordability check regardless of any equity in your home.

Typically, the maximum personal loan is £25,000 with most mainstream lenders. Rates with other lenders are often 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, it’s worth doing a trial run via Airbnb or another similar platform before making a longer-term commitment.

Refinance an investment property

If you have other properties, you could look to raise funds from that in a number of ways:

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

A specialist broker 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 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 and 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 to this lies in your individual circumstances and preferences. You will need to speak to an equity release advisor to discuss all options before making your decision.

Downsizing or taking in a lodger will usually have the greatest impact on your day-to-day life, while 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. If you need cash quickly to take advantage of an investment opportunity, for example, time is not on your side and the quickest method may therefore be preferable to the cheapest.

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

Fortunately, you can’t take out an equity release product without speaking to a qualified advisor. This should prevent you from rushing into one without giving it proper consideration. Not all specialists will be able to advise on all the alternatives though, so we recommend speaking to a specialist mortgage broker for the full picture.

Benefits and considerations

There are considerations with Equity Release that 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 to 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, there may not be much for them to inherit.
  • Your home won’t be passed on. If your home must be sold to repay the loan, it will no longer be kept in your family. Some lenders will allow your loved ones to repay the loan through other means, such as existing savings, to avoid selling the home, but this isn’t always an option
  • There are costs involved. You may need to pay an application fee, solicitor’s fee, and a valuation fee. If you decide at any time that you’d like to leave your equity release agreement and repay the loan in your lifetime, there will often be an early repayment charge.
  • It will be difficult to remortgage. Choosing equity release now will mean that there is a charge against your property. If you later decide that you’d like to raise capital against your home another way, such as remortgaging, this will make it difficult to do so.

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: Equity release is something you should never do lightly, so it’s important to seek impartial advice from a later-life lending specialist before you begin. Make an enquiry with us and we’ll match you with 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 these three steps have been completed, 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 a timeframe of around eight weeks before you’re able to access your funds. Home reversion plans typically take slightly longer, approximately 10-to-12 weeks before the equity release process is complete.

Eligibility criteria

To qualify you will need to be over the age of 55 (or over 65 for a home reversion plan) and own your own home. Most providers prefer you to have paid off your mortgage and hold 100% equity in the property.

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

If it’s a joint application, both you and your partner will need to be at least 55.

How much equity release will you qualify for?

Most equity release providers will cap the amount they will offer at somewhere between 20% and 50% of the property’s market value. Some go higher than this and others lower.

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 conditions which qualify, so speak to an expert for a full 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. There’s no set limit that 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.

This is another area where the value of your home can be a factor as most equity release providers will only consider your application if it’s worth at least £70,000.

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

Equity Release Calculator

Use this calculator to determine how much capital you could unlock from your home through equity release, based on your age and the property's market value.

Estimate if you're unsure
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For joint applications the amount you can release is based on the age of the youngest applicant
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Your Results:

The Maximum Equity you could release is

The amount is of your homes value, the maximum most borrowers your age can release.

Get Started with an Equity Release Specialist and find out exactly how much you could release.

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Can you get out of an equity release plan?

Yes. It is possible to exit an equity release plan, but it can be 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 early. Downsizing may be another possibility.

Get matched with a later-life lending specialist

The brokers we work with have whole of market access and are fully trained in advising on equity release products. Our broker-matching service will put you in touch with a later-life lending specialist who 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 0808 189 2301 or enquire online to arrange a free, no-obligation chat.

FAQs

No. Your home is secure until you pass away or go into long-term care. You are entitled to remain in your home for as long as you live. If you have a partner and one of you dies or goes into care, the surviving partner can remain in the property.

Credit cards are for short term borrowing. Building up debt on a credit card can be costly and lead to you simply servicing the debt without reducing your balance. It is not recommended for major purchases, particularly if you are heading towards retirement and anticipate a drop in income.

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 this is not the case, you can still move house but may have to repay some of the capital you’ve borrowed early.

Yes. 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, the 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.

The other tax implication of equity release to consider is 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

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

An LPA 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.

They could be. If you’re on means-tested benefits such as pension credit, savings credit or council tax benefit, an increase in your savings because of equity release can affect them. There are limits on how much savings you can have before you start to lose your benefits.

Yes, although it may make more financial sense to sell the second property rather than using equity release again. Speak to an expert for more information on this.

Equity release is a highly regulated form of borrowing and the Equity Release Council has put a number of safeguards in place to protect customers who choose to access it.

The council’s ‘no-negative equity guarantee’ ensures that you can never end up owing more than the value of your property.

The worst-case scenario is that you could incur significant debts that will be paid off when you’re no longer able to use the house. As a result, you might not be able to pass on the property to your inheritors (assuming you plan to leave something behind).

You should also be aware that any means-tested benefits claims could be affected as moving money from your equity to your savings could affect your eligibility for pension credit and council tax benefit.

Mortgage equity withdrawal (or MEW) is a collective term used in the US property market to describe their equity release products. The purpose of MEW is to allow homeowners to utilise the equity held within their property as collateral for a loan. This loan could be in the form of a home equity loan, second mortgage, or a similar HELOC (home equity line of credit).

There is no direct product equivalent in the U.K.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

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Pete Mugleston

Mortgage Advisor, MD

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