Your home may be one of the largest assets you own, and unlocking property wealth using equity release could significantly boost your funds later in life.
According to the Equity Release Council, in the final quarter of 2024, homeowners withdrew around £622 million from their homes. The average person withdrawing a lump sum for the first time received £115,243.
A cash boost of that size might mean you’re able to enjoy some retirement experiences you previously thought were out of reach. Alternatively, you may want to pass on some of the money to loved ones or update your property so it better suits your needs.
While discovering you could increase your accessible cash is exciting, it’s essential you understand how equity release works first. For some homeowners, the drawbacks will mean it’s not the right option for them.
Here are seven things you need to know if equity release is something you’re considering.
1. Equity release is a type of mortgage
Essentially, equity release is a type of mortgage that lets you access some of the money that’s tied up in your home. Usually, you’ll need to be at least 55 to be eligible for equity release and own your home. You might be able to use equity release if you have an existing mortgage on the property, but you’ll need to pay this off with the money you release.
Where equity release is different to a traditional mortgage is that you don’t have to make repayments, though you can choose to do so. Instead, the money is repaid when you die or move into long-term care.
2. The interest on the loan is rolled up
As you don’t have to make repayments, the interest accrued is rolled up. This means the interest compounds, so the outstanding balance can rise quickly.
Let’s say you borrow £50,000 through equity release with an interest rate of 5%. In the first year, the interest accrued would be £2,500. Assuming you don’t make any repayments, the following year, you accrue interest on the original amount you borrowed plus the £2,500 added to your debt, so the accrued interest in year two is £2,625.
In this scenario, 10 years after accessing property wealth, the outstanding balance would be £83,350, and it would rise at a faster pace with each passing year.
If you want to manage the debt, you might choose to pay the accrued interest, or a portion of it, if you have the income to do so.
3. Equity release is likely to affect the inheritance you leave for loved ones
As the amount you owe will typically rise during your lifetime, equity release will often affect the inheritance you leave behind for loved ones. Usually, your home would be sold to cover the bill and your loved ones would receive the profit that is left. So, if you want to pass on your home to your children, equity release may not be right for you.
Most equity release lenders offer a no negative equity guarantee, this means the amount owed cannot exceed the value of the property.
In some cases, it is also possible to ringfence a portion of the property wealth to leave to your beneficiaries. However, this is likely to affect how much you could access through equity release.
4. The value of your home affects how much you can access
Before you start making plans after seeing how much the average family can unlock through equity release, the amount you can access will depend on a range of factors, including the value of your home and your age.
Don’t simply access the full amount if you don’t have plans to use it either. The interest rate you’d pay is likely to be higher than the amount you would earn if it was in a savings account, so you’d lose out. Instead, work out what you need to achieve your goals.
If you want flexibility, you may choose a drawdown plan. This would allow you to access an initial lump sum and then withdraw more in the future if you need to.
5. Equity release may make it difficult to move home
Before you proceed with equity release, it’s worth thinking about your long-term plans – do you have any plans to move in the future?
You may be able to port the equity release loan when you move to a new property, but it can make it more difficult. So, it’s worth thinking about whether your home meets your current and long-term needs.
6. Equity release may affect means-tested benefits
If you currently receive means-tested benefits, you should be aware that accessing a lump sum or taking regular amounts through equity release could affect your eligibility.
7. There are alternatives to equity release
Don’t jump into looking at equity release without assessing the alternative options. You might find one that is better suited to your needs.
For example, downsizing could release some equity without taking out a loan, or you might be able to meet your goals using other assets, like your pension or savings.
We can answer your equity release questions
If you’d like to understand how much property wealth you could unlock and the pros and cons of doing so, we’re here to answer your questions. Please get in touch to arrange a meeting.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
A lifetime mortgage is a loan secured against your home. To understand the features and risks, ask for a personalised illustration.
