What is equity release, and how does it work?

Equity release is a way to tap into some of the value of your home without having to move out., Its popularity in the UK has grown in recent years as property prices have soared. Many people use it to supplement their retirement income, but it isn’t without risk, and there may be better alternatives. On this page, we’ll see how equity release works and who’s eligible, plus and some factors to consider when deciding if it’s right for you.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

Equity release can be defined as a financial product offered by some insurance companies that lets you convert some of your home’s value into cash while continuing to live there. Homeowners aged 55 or over can access some of the money tied up in their property without having to sell it or move out.

This is usually done through a special type of equity release mortgage. Unlike a standard loan, however, the homeowner doesn’t necessarily have to make monthly repayments. Instead, the loan is repaid when they sell the home and move into long-term residential care or pass away. 

In the UK, equity release is often used as a way to top up pension income or cover the cost of care in later life. But it has also been the subject of controversy in the past, with concerns that some homeowners were being drawn into taking out an equity release loan that was unsuitable for them. That’s why it is important to understand how equity release works.

To explain equity release on a property, it is helpful to understand what equity is. Anyone with a mortgage will have equity, which is the difference between the value of your home and what you still owe, i.e. your remaining mortgage balance. Say your home is worth £300,000 and you have £50,000 left to pay on your mortgage, your equity will be £250,000. 

For most equity release plans, you don’t need to have fully paid off your mortgage. However, you will typically  need to use part of the funds from the equity release to clear any outstanding mortgage balance before accessing the rest.

1. Get advice from a qualified, FCA-approved equity release adviser.
2. Value your home to see how much equity you can release.
3. Choose between a lifetime mortgage or home reversion.
4. Consult with a solicitor to check everything is legally sound.
5. Receive your money as a lump sum or regular payments.
6. If it’s a lifetime mortgage, the loan is repaid (plus interest) when you sell your home or pass away.

The amount of equity you can release ranges from 20% to 60% of your home’s value. Generally speaking, the longer you’ve owned your home, the more you can release. Other factors include the property value and house type.

With equity release mortgages, the minimum lump sum you can take is typically £10,000. Online calculators can give an estimate of how much you might be able to unlock from your property, but a financial adviser can provide clearer guidance.

Yes, broadly speaking, the money you receive from equity release is tax-free because it’s from a loan, not income. So you won’t pay income tax or capital gains tax. However, while it can be tax-efficient for you, the loan and any interest that builds up on the loan will be repaid from your estate after you pass away.

There are two main ways to take equity out of your home: 

1. Lifetime mortgage

2. Home reversion plan

Lifetime mortgage is when you take out a mortgage loan against your property, and you can then either take a lump sum or withdraw smaller, ongoing amounts as needed, known as drawdown. This is the most common example type of equity release scheme, making up more than 99% of the market.* With drawdown, you only pay interest on the money you take out, not on the total equity release loan amount.

When the final person on the loan agreement dies or moves into care, the home will be sold to repay the loan. Any leftover money goes to the beneficiaries. 

An important feature of this type of equity release plan is the no-negative-equity guarantee, which means your beneficiaries won’t owe more than the home’s value, even if the loan amount (plus interest) exceeds what the property sells for.

A home reversion plan is a type of equity release scheme that allows you to sell all or part of your home to a provider in return for a lump sum, regular income, or both.  You can continue living in your property rent-free for the rest of your life, but you’ll typically receive less than the full market value of the share you sell. 

You can typically sell between 25% and 60% of your home. Providers may offer a higher percentage to an older or less healthy applicant, as there is likely a shorter period to wait before recouping their investment. 

Because you’re selling a share in your home (not taking out a loan), there is no interest or monthly payments.

Eligibility criteria for equity release schemes vary by provider, but you typically have to meet these requirements:

• Minimum age: 55+ for lifetime mortgages; 60+ for home reversion
• Homeownership: Must own a UK property as your main residence
• Property value: Usually £70,000+ and in good condition
• Mortgage: You can have one, but it must be repaid (often using the funds from equity release)

Most equity release loans charge interest, which is usually calculated daily and added to your loan monthly. Some providers of lifetime mortgages don’t require monthly repayments during your lifetime, so the interest compounds (meaning you pay interest on both the original loan amount and the accumulated interest). However, terms can vary by provider, so it’s important to check the details before entering into a loan agreement.

The amount you owe will ultimately depend on your equity release mortgage type, your lender’s interest rate, and whether you make voluntary repayments. Rates are often linked to the Bank of England’s base rate. Learn about how the base rate impacts mortgages.

If you take extra funds with a drawdown mortgage, the new amount will be charged interest at the current rate, which may be higher or lower than your original rate. With a lump sum lifetime mortgage, interest starts building immediately on the full amount. 

You can read more about what’s next for interest rates in the UK.

You don’t have to have a specific reason for releasing equity from your home. 

Some common reasons include:

• Pay off debts

• Fund home improvements

• Boost retirement income and supplement pension funds

• Buy a second home

• Cover the costs of care

• Support family members with gifts, holidays, or give children a helping hand as they save for a mortgage.

Using equity release to pay off debt may not always be advisable, as it can lead to a cycle of increasing debt. It can be worth speaking with a financial adviser or debt relief organisation for guidance and alternatives.

If a home has an equity release plan, it’s usually sold to repay the loan and interest, which can significantly reduce the inheritance left to beneficiaries. However, if they have the money, they can pay off the equity release loan without selling the property.

For lifetime equity release mortgages approved by the Equity Release Council, a no-negative-equity guarantee ensures that neither you nor your beneficiaries will owe more than what the property sells for. To make it easier after they’re gone, homeowners can make optional repayments of up to 10% of the loan per year to reduce the balance.

With home reversion plans, the lender recoups their share when the house is sold, either after the homeowner passes away or moves into long-term care.

You can only release equity from your house with the help of a qualified equity release adviser. If you opt for an equity release firm, they would need to provide a guarantee that you can stay in your house for life and also offer a no-negative equity guarantee. 

You can consult a financial adviser to help you find the right equity release mortgage or plan for you, and they should ideally be registered with the Financial Conduct Authority (FCA). Your adviser will provide a personal recommendation that includes an equity release scheme, costs, interest rates, and any potential repayments. 

You can find FCA-authorised firms and advisors through the Equity Release Council directory.

Equity release is not for everyone. Before opting for an equity release mortgage, you might look into some of the following alternatives:

• Downsize your home. Moving to a smaller, cheaper property can free up money.
• Access savings or investments. Cashing in savings or selling investments can provide cash without releasing equity. Making sure you’re getting an optimal interest rate on your savings by comparing savings accounts can be a simple yet effective step to grow your money.
• Retirement interest-only mortgage. This is similar to equity release, but you only pay the interest each month, keeping the original loan amount the same until you sell the house or pass away.
• Remortgage. This can lower your monthly payments and help you access some equity.
• Rent out a room. If you have extra space, renting it out can give you a cash boost. You can find some more ideas in our article on how to save money.
• Local grants. Check for any assistance from local authorities. Find out more about financial help for elderly parents.
• State benefits. Make sure you’re claiming all the benefits you qualify for.

It can help to talk to a financial adviser or mortgage broker for advice on your particular situation.

If you have released equity from your home, you might not need to spend it all at once. Whether you’ve taken a lump sum or are drawing funds in smaller chunks, you might start thinking about putting it to work. 

At Raisin UK, you can find a wide range of competitive savings accounts from our partner banks and building societies. Choose from:

• Fixed rate bonds if you want a set return after a fixed period

• Easy access savings accounts if you want the option to withdraw your cash

• Notice accounts that combine competitive interest with relatively easy access to your cash after a set notice period

All the savings accounts on our marketplace are covered by the Financial Services Compensation Scheme up to £85,000 per person, per bank.

*https://www.equityreleasecouncil.com/news/council-publishes-q4-fy-2024-lending-figures/

**https://www.ftadviser.com/equity-release/2025/1/13/green-shoots-of-recovery-in-equity-release-market/