For many retirees, the biggest asset they own is their home. If your pension income feels tight but your house is worth a lot, it is natural to wonder whether you can tap into some of that value without moving out. That is what equity release offers.
It can be genuinely useful, but it is also expensive, hard to undo, and it affects what you leave behind. Here is how it works, the real pros and cons, and the cheaper alternatives to look at first.
Quick answer: Equity release lets homeowners aged 55 or over unlock cash from their home while still living in it. The money, plus any interest, is usually repaid when you die or move into long-term care. It is tax-free cash, but interest can build up quickly, set-up fees are often £1,500 to £3,000, and it can reduce means-tested benefits and your inheritance. You must get specialist advice before taking it out.
In this guide
- How equity release works
- Lifetime mortgages vs home reversion
- How interest builds up
- The pros
- The cons
- Protections to look for
- Cheaper alternatives
- Questions to ask before you sign
How does equity release work?
Equity is the part of your home you own outright: its value minus any mortgage. Equity release lets you turn some of that into cash without selling up. You can usually take it as:
- a single lump sum (most lenders have a minimum of around £10,000)
- smaller amounts when you need them, known as “drawdown”
- a mix of both
You carry on living in your home. The amount you owe is normally paid back from the sale of your home after you die or move into long-term care.
Lifetime mortgages vs home reversion
Lifetime mortgage
This is by far the most common type. You borrow money secured against your home, and you still own it. You can choose to pay the interest each month, pay some of it, or pay nothing and let it “roll up” on top of the loan. Lifetime mortgages are usually available from age 55.
Home reversion
You sell all or part of your home to a provider in exchange for a lump sum or regular income, and you get a lifetime tenancy so you can stay. The catch is that you are typically offered only 20% to 60% of the market value of the share you sell. When the home is eventually sold, the provider takes its share of the sale price. Plans are often only available to people aged 60 or 65 and over, with a mortgage-free home.
How interest builds up
With a lifetime mortgage where you make no repayments, interest is added to the loan each year, and next year’s interest is charged on the bigger total. This is compound interest, and it is the biggest thing to understand before you sign.
As an illustration, if you borrowed £50,000 at a fixed rate of 6% and made no repayments:
- after 10 years you would owe about £89,500
- after 15 years, about £120,000
- after 20 years, about £160,000
Actual rates vary, so ask for a personal illustration. The earlier you take out equity release, the longer interest has to grow. Many plans now let you make voluntary repayments to slow this down.
The pros of equity release
- Tax-free cash as a lump sum or in instalments
- You stay in your own home, with the right to live there for life or until you move into long-term care
- No affordability test like a normal mortgage, and repayments are optional on most plans
- You still benefit from rising house prices on the part you own
- Flexibility to pay for home adaptations, clear an existing mortgage, or help family
The cons of equity release
- It can be expensive. Rates are often higher than normal mortgages, and interest compounds.
- Set-up costs. Advice, valuation, legal and arrangement fees can add up to around £1,500 to £3,000.
- Less to leave behind. Your family inherits only what is left after the loan is repaid.
- Impact on benefits. A lump sum sitting in the bank can reduce or stop means-tested help such as Pension Credit, Council Tax Reduction or grants.
- Fewer options for care. You may need the value of your home later to pay for care.
- Hard to change. Early repayment charges can be high if you change your mind.
- Restrictions. You may not be able to let out the property, leave it empty for long periods or make big structural changes.
Protections to look for
Look for a plan from a member of the Equity Release Council. Its product standards for lifetime mortgages include:
- No negative equity guarantee: you or your estate will never owe more than the value of your home, as long as the terms are met and the home is sold for the best price reasonably obtainable
- Fixed or capped interest for the life of the loan
- The right to live in your home for life, or until you move permanently into care
- The right to move and take the plan with you to a suitable new home, subject to the lender’s criteria
- The right to make repayments without charges, subject to the lender’s criteria
- Early repayment charges waived if you move permanently into long-term care
You will also need independent legal advice from your own solicitor before any money is released. And always check your adviser is authorised using the FCA Firm Checker.
Cheaper alternatives to consider first
- Downsizing. Selling and moving somewhere smaller can free up more money with no interest at all. See our guide to downsizing your home in retirement.
- A retirement interest-only mortgage. If you can afford monthly interest payments, the debt does not grow. The loan is repaid when the home is sold.
- Using savings or investments first. It may cost less than borrowing.
- Claiming benefits you are missing. Extra income from Pension Credit or Attendance Allowance could solve the problem without borrowing. See the benefits you might be missing out on.
- Grants for repairs and adaptations. Your council, or charities such as Foundations in England, may be able to help with home improvements.
- Family help. If relatives would inherit your home anyway, they may prefer to help now.
If you are thinking about equity release to deal with debts, speak to a free debt adviser first, such as National Debtline or StepChange. And if you still have a mortgage, read our guide to retiring with a mortgage in the UK.
Questions to ask before you sign
- How much will I owe after 5, 10 and 15 years if I make no repayments?
- Can I make voluntary repayments, and how much each year?
- What are the total fees, including advice and legal costs?
- What are the early repayment charges, and when do they apply?
- Can I move house and take the plan with me?
- How will this affect my benefits and my partner’s right to stay in the home?
- Is the adviser searching the whole market?
Take your time, involve your family if you can, and never feel rushed. A genuine adviser will not pressure you. Our guide to avoiding scams in retirement explains the warning signs, and our article on getting financial advice for retirement explains what to expect from an adviser.
Frequently asked questions
Is equity release money taxable?
No. The money you release is tax-free. But if you invest it or leave it in savings, any interest or returns may be taxable, and it could count towards means-tested benefits.
Can I leave my home to my children?
Yes, but they will only inherit what is left after the loan and interest are repaid, or the share of your home you did not sell. It can also affect your inheritance tax planning.
What happens if my partner and I take it out together?
With a joint plan, the loan is usually repaid only after the second person dies or moves into long-term care, so the surviving partner can stay in the home.
Do I need a Lasting Power of Attorney?
It is not required, but it is sensible. If you later lose capacity, your attorney can deal with the plan for you. See our guide to Lasting Power of Attorney.
Final thoughts
Equity release can make a real difference for some people, especially those who want to stay in their home and have no other way to raise money. But because the cost grows over time and it is hard to reverse, it should usually come after you have looked at the alternatives.
If you do go ahead, borrow only what you need, use drawdown rather than a big lump sum if you can, and choose a plan with the Equity Release Council protections. For more ways to cover the gaps in your budget, see our guide to the hidden costs of retirement.
