What is equity release? Lifetime mortgages, costs and fees explained

What is equity release?

Equity release is a way for over-55s to access some of the money in their home, while continuing to live there. 

If you're looking to address a pension shortfall, or address debt, or want reduce your inheritance tax bill or finance later life care, equity release can appear attractive, especially if you lack other borrowing options. But it's an expensive, lifetime commitment that's not right for everyone.

There are two types of equity release product: lifetime mortgages and home reversion plans, and they work in different ways. 

• Lifetime mortgage: this is the most common way of releasing equity. You borrow some of your home's value and this loan is repaid when you sell the property, pass away, or go into care.
• Home reversion plan: you to sell part - or all - of your home to a home reversion provider in return for a cash lump sum or regular income (or both), while you stay living in it. When the property is sold, usually after you die or move into care, the reversion company gets its share of the proceeds. 

This guide explains what you need to consider and how much it will cost, based on interest rates and fees.

If you take out an equity release product recommended by HUB Financial Solutions, Which? will earn a commission to help fund our not-for-profit mission

Is equity release right for you?

Speak to the experts at HUB Financial Solutions, they'll be able to help

Go to HUB Financial Solutions

What is a lifetime mortgage?

Lifetime mortgages are the most popular type of equity release. You take out a loan against your property, which is repaid from the proceeds when it is sold. 

The amount you can borrow depends on your age and how much your home is worth. You'll need to be at least 55, but the older you are, the more you can borrow. The maximum you can borrow is around 60% of the value of the house.

You can opt to take a lump sum - where interest is charged on the whole amount at a fixed rate - or take chunks of cash when you need it, only paying interest on the money you've taken. 

By spreading out the amount you borrow in this way (known as ‘drawdown’), you’ll reduce the impact of compound interest. 

Interest costs of lifetime mortgages

The cost of borrowing via a lifetime mortgage can be very high because of the way interest compounds over time. Unlike with ordinary mortgages, you don't have to make monthly repayments on a lifetime mortgage, but this can make them very expensive as the interest rolls up.

• For example, if you took out a lifetime mortgage worth £100,000 at a rate of 4.5%, you’d still owe £196,156 after 15 years - nearly double the amount you originally borrowed. 
• Borrowing at a rate of 6% when you are 60 will mean that the amount you owe will double around every 12 years. So a loan of £40,000 would mean a debt of around £160,000 by the time you reach age 84. 
• This can be mitigated somewhat by making voluntary partial repayments each year, reducing borrowing costs.
• The average interest rate on a lifetime mortgage rose from just over 4% in early 2022 to over 6% in summer 2023, according to Moneyfacts, but more costly deals can be nearer 8%.

If house price growth is strong throughout the period of your lifetime mortgage, you could still end up with a substantial amount of equity in your property even after your outstanding debt is settled. 

But the opposite scenario is also possible, although you'll never have to repay more than the value of the property, as members of the Equity Release Council, a trade body for providers of the schemes, comply with its 'no negative equity guarantee'. 

This guarantee means your family won't have to cover the shortfall if the value of your property when sold is less than the outstanding loan.

Finally, it's worth noting that lifetime mortages, and remortgaging to release cash from your home, are different types of product.

Can you repay the loan early?

It's possible to do this but most plans aren't set up to be repaid until you/your partner pass away or need long term care. Deciding to repay your loan early often triggers an early repayment charge. The amount depends on how long you’ve had the loan, but in some cases it can be as high as 25%.

• Most products apply penalties on a sliding scale, although the fee varies according to how long you’ve had the loan. 
• The charge will typically start at about 5-10%, reducing as you have the loan over a number of years - for example, it might fall to 3% in years 6 to 8.
• If you want to make partial repayments, you can do this penalty-free for lifetime mortgages that meet standards set by the Equity Release Council. These are often limited to 10% of the loan per year. 

However, you can often switch your lifetime mortgage and save money, to another provider offering a lower interest rate. Note this is only an option to those with a lifetime mortage, not a home reversion plan.

What is a home reversion plan?

Home reversion plans are only available to older homeowners, and are a less popular form of equity release.

• With these, you sell a share of your home to the equity release provider while continuing to live there - it's sort of like renting your home. You can receive a lump sum, or an income, or both.
• You can usually sell between 25% and a 100% share of your property to the provider, but you will receive less than the market value of that share.
• That's because the home reversion provider does not know how long you will live, as it can't sell the property until you pass away or go into care. That risk is reflected in what they pay you.

When you die or move into long-term care and the property is sold, the provider gets the same share of whatever your home sells for as repayment. For example, if you sold 50% of your property to the provider, it would get 50% of the sale price. If you sold them 100%, they will get all of the sale proceeds.

Costs of home reversion plans

As a result of the above, home reversion don't offer great value for money as you don't receive the full market value of your share when you sell to the provider. 

Some plans demand more than 70% of your home's value for just a 20% advance. And the younger you are, the bigger the share a provider will demand from you, because they will have longer to wait before they can sell the property. So these are usually more appropriate for people who are over 70.

Bear in mind that some home reversion plans set a minimum age that's higher than 55.

Here's how it might work:

• You own a home worth £300,000. 
• A home reversion provider offers to give you a £50,000 lump sum in return for 50% ownership of your home. 
• You pass away but your home is now worth £400,000. The house is sold for £400,000 and the provider receives 50% - £200,000. Your estate receives £200,000.

Lifetime mortgages vs. home reversion: how your debt can grow

The graph below compares how much you'll owe over 25 years after releasing £75,000 in equity through a lifetime mortgage (at 5.5%) and home reversion. (Actual costs and timescales will vary).

• Based on a £250,000 property, you can see how your equity release debt could grow over time, dramatically reducing the the equity you have left.
• In this example, releasing £75,000 means that you could relinquish up to 70% of your property's value.

This may not be suitable if you're hoping to pass on your property, or the full value of your property, to your relatives. For this reason, it's important to always seek professional advice before choosing equity release.

Equity release costs and fees

Various fees are likely to be charged when you enter into an equity release agreement, on top of the interest you will pay. This can total between £1,500 and £3,000 depending on the plan.

• Application fees: not all providers will charge a fee, but it can be around £500 or £600. You may be able to add this to the amount you borrow. 
• Legal/solicitor fees: these are typically around £500 or £600 and cover the work conducted by your solicitor in dealing with the legal side of setting up the arrangement.  
• Valuation fees: these can vary according to the property value but tend to be a few hundred pounds. Some lenders offer free valuations.
• Adviser fees: you'll need to get financial advice before using equity release. This can cost in the region of £1,000, but some advisers receive commission from lenders instead of charging customers.

Is equity release safe? 

We wouldn't recommend it to everyone, there may be better alternatives, and you can only take out an equity release product via a qualified financial advisor - see below for how to find one. Here's what you need to consider:

Pros of equity release

• Equity release can prove useful if you have value tied up in your property but are worried about having enough to live on in retirement, or to cover care costs.
• You can use the tax-free cash however you wish, whether that's for home improvements or helping out relatives. 
• You'll be able to stay in your home for the rest of your life or until you move into care so won’t face the potential hassle of having to move.
• There is no obligation to make any repayments, although some products allow you to do so.
• The ‘no negative equity guarantee’ means that you will never owe more than the value of your property when it's sold.
• It is a way of potentially cutting inheritance tax by freeing up cash to give to the family now, but inheritance tax might still apply if you die within seven years of gifting money.
• For some lifetime mortgages, interest rates are either fixed or capped.

Cons of equity release

• Not making any repayments on your loan will mean you end up paying far more than you’ve borrowed, due to the compounding of interest. This could mean the value of your property is wiped out entirely.
• Changing your mind can prove costly as repaying your loan early often triggers an early repayment charge.
• Using equity release will often reduce the size of your estate and the amount you’ll be able to leave behind for loved ones as the lender is repaid before the rest is divided among beneficiaries.
• Equity release can impact any means-tested benefits you are entitled to - for example, pension credit and reduced council tax - for example, if you take a lump sum.
• If you decide to move, your provider might not let you transfer your mortgage if your new property doesn’t meet its criteria. For example, it might not accept sheltered housing.
• Once you have an equity release plan in place, you won’t be able to use your home as security for any additional loans.
• With home reversion schemes, the lender will usually pay a lot less than the full market value of its share of your property and you will no longer be the sole owner.

How to reduce risks when taking out equity release

Firms selling or giving advice on equity release products must be authorised by the Financial Conduct Authority (FCA). 

Under FCA rules, a firm advising you about an equity release product must take reasonable steps to ensure it is suitable for your needs and circumstances. 

The Equity Release Council (ERC) represents providers and promotes standards of conduct and practice in the sector. Products provided by members of the ERC should meet the following standards:

• For lifetime mortgages the rate must be fixed for each release or, if variable, the rate must be capped for the life of the loan.
• You must have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract.
• You have the right to move to another property subject to the new property being acceptable to your lender as continuing security for your equity release loan.
• The product must have a 'no negative equity guarantee'. This means that when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan, neither you nor your estate will be liable to pay any more.
• All customers taking out new plans which meet the Equity Release Council standards must have the right to make penalty-free payments, subject to lending criteria.

Where can you get professional equity release advice?

Before using equity release, you’re required to get professional advice - make sure they are are specialists in equity release. Advisers should hold one of the following approved qualifications:

• CeRER (Certificate in Regulated Equity Release) – awarded by the Institute of Financial Services (IFS).
• CER (Certificate in Equity Release) – awarded by the Chartered Insurance Institute (CII).
• ERMAPC (Equity Release Mortgage Advice & Practice Certificate) – awarded by the Chartered Institute of Bankers in Scotland. The ERMAPC was discontinued a few years ago but may still be held by some advisers.

You can search for qualified advisers through the Society of Later Life Advisers. The Equity Release Council also has a member directory.

A free alternative is the charity StepChange, which compares providers and can arrange an equity release deal for you through a StepChange Financial Solutions adviser. Its advisers are paid a salary, so there are no sales targets, bonuses, or commissions. 

Which? has also partnered with HUB Financial Solutions who can advise on whether equity release is right for you, and how to take out a suitable product if it is.

Equity release FAQs

Can you sell your house if you have equity release?

A lifetime mortgage can be transferred to a new property, subject to the lender agreeing that the new house is suitable. But remember that paying off some of the loan in the process, could trigger early repayment charges. 

Home reversion plans however can mean the property is owned by the home reversion provider.

Does equity release affect my entitlement to benefits?

Freeing up money through equity release can affect your entitlement to means-tested benefits - for example, you may no longer be eligible for pension credit or council tax support. 

You'll need to consider whether equity release is still worthwhile in this case. 

Benefit claimants must tell the Department for Work and Pensions (DWP) or their local council about the money generated from equity release.

Are there alternatives to equity release?

Equity release isn't your only option if you're looking to raise funds. Increasing numbers of lenders offer retirement interest-only mortgages. These enable you to pay off the interest on the loan each month, not the capital value.  

You should also weigh up whether you're able to release money by downsizing, though you'll need to factor in the costs associated with moving home, including estate agent's fees, removal costs and possibly stamp duty.

• Remortgaging is another option for freeing up money if you've built up a significant amount of equity in your property. 
• The advantage of remortgaging is that you'll keep the ownership of your home and can always switch to a different mortgage more suitable for your financial position.
• For smaller amounts, borrowing via an unsecured personal loan or credit card will be much cheaper than equity release.
• If you have a spare room in your home that you'd be happy to rent out, the government’s ‘Rent a Room’ scheme lets you earn up to £7,500 a year tax-free. The tax exemption is automatic, so you only have to fill in a tax return if you earn more than £7,500 in any year.