Releasing equity from your home

The costs of buying and selling property can be substantial.

For example, based on the average UK house value of £248,000 (UK House Price Index March 2020), the average cost of moving home is almost £9,000.

Think carefully before you make such a major decision. Maybe you need the extra bedrooms so that your grandchildren can visit. There may be many happy memories and an emotional attachment to your home. You might have strong relationships with neighbours you can rely on and trust. It's also very comforting knowing where everything is and feeling part of a community.

If you'd prefer to stay in your home, releasing cash from your home may be the solution. This is called 'equity release'.

You sell part, or all, of your home and receive a tax-free lump sum, a regular income, or both. You stay living in your home as a tenant, but you pay no rent.

When your home is eventually sold, either when you die or move into long-term care, the home reversion company gets their share of the proceeds of the sale.

An important thing to know is that the home reversion company does not pay you the full market value of your home. For example, if your home is worth £200,000 and you choose to sell it all to them, they will usually only pay you between 30% and 60% of its value depending on your age and health – that’s between £60,000 and £120,000.

The older you are when you start a home reversion plan, the higher the percentage you may be able get.

These percentages may look low, but you will be receiving a tax-free cash sum and living in the property rent free for as long as you need to. You could be living there for decades before the home is eventually sold. 

You could still be required to pay other costs like ground rent no matter what proportion of your home has been sold.

You take out a mortgage against your home to release a tax-free cash sum or smaller amounts as and when you need them, but you are still the owner of your home.

You don’t usually have to make any mortgage repayments while you’re alive. Instead the interest is added to how much you owe and once the property is sold the total debt, including all the rolled up interest, is repaid. This means that the debt can increase quite quickly, especially if your home is not sold for a long time.

You can stay in your home for life or until you move into long term-care. You may also be able to move to another home and transfer the mortgage to it, providing the new property is acceptable to the lifetime mortgage company.

Just like with ordinary mortgages, the products vary from provider to provider but you can usually pay off some of the interest or debt if you want to before your home is sold to reduce how much you owe and you may be able to protect some of the value of your home to leave an inheritance.

You can usually borrow up to 60% of the market value of your home, but this will depend on your age and the value of your home and you may be able to borrow more if you have certain medical conditions. 

The interest rate must be a fixed rate (which doesn’t change – up or down) or a variable rate with a cap (an upper limit it cannot go over, but it can go down).

Lifetime mortgages also have a ‘no negative equity guarantee’. This means that once your home is sold, and both agents’ and legal fees have been paid, if there is not enough left to clear the loan completely the lifetime mortgage company cannot ask you or your estate to pay any remaining debt. 

Most people who take out equity release use a lifetime mortgage.

If you downsize or release equity from your home early in your retirement, you may not be able to rely on your home to provide any further money you need later.

Equity release isn’t the first choice to fund long term care if you are moving into a residential care home. This is because, moving into residential care usually means ‘settling’ the equity release product by selling your home and paying back the money owed under the terms of the contract.

However equity release could still be an option in specific circumstances. For example, if the person needing care wants to remain in their own home with a live-in carer, but the local authority has limited the amount they will pay because residential care is more often more affordable. Equity release may be an option to make up the shortfall.

We recommend you get independent financial advice for your own specific circumstances. 

All advisers recommending equity release schemes must have a specialist qualification.

If the care user has moved into long term residential care after taking out an equity release product, this typically means ‘settling’ the equity release product by selling your home and paying back the money owed under the terms of the contract. It may not be the case if their spouse or partner is still living at the property.

We recommend you get independent financial advice for your own specific circumstances. 

All advisers recommending equity release schemes must have a specialist qualification.

With a lifetime mortgage, interest will continue to be added to your debt meaning you pay back more than you received when the house is sold or you move into long-term care.

With a home reversion plan you will have sold your home for less than its market value. When it is sold, you will only receive money back for the proportion of your home which you still owned. For example, if you sold 50% of your home, you will only receive the remaining 50% of the sale proceeds back.

On top of these costs, there will also be arrangement fees for both types of plan. These can be between £1,500 and £3,000 depending on the type of equity release plan you have chosen.

Although the money you receive is tax-free, it may affect your entitlement to any means-tested state benefits. This is because you now have savings, possibly over the limit allowed to still receive full or partial benefits.

Depending on how you release equity from your home and any optional features you have taken out, you may not have much money left to leave as an inheritance, if anything.

If you change your mind after taking out a home reversion plan or lifetime mortgage, they can be difficult to unravel and there may be early repayment fees.

It is important to take advice from an independent financial adviser before taking out an equity release product. Advisers who recommend them must have a specialist qualification.

Find an adviser who is a member of the Equity Release Council.