What is equity release?

Zorica Lončar

If you own your home and you’re over 55, you might be considering equity release. But what actually is equity release, how does it work and is it the right option for you?

In this guide, we’ll walk you through all the essentials you need to know about equity release. Whether you ultimately decide to go for it is completely up to you (and it could be a good idea to seek financial advice first) but we’ll cover the main options and considerations that could help you make up your mind.

Plus, a handy tip if you’re planning to access equity release schemes for overseas properties you own. Open a Wise multi-currency account and you can send and receive money internationally for tiny fees and the real, mid-market exchange rate.

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But first, let’s cover some equity release basics.

What is equity release and how does it work?

Equity release is a way of unlocking value or ‘equity’ in your home, without having to sell it. You’ll get a cash lump sum or smaller regular payments, but you can still carry on living in your home.

Aimed at older and retired people, equity release is a type of mortgage. But the main difference is that unlike a normal mortgage that usually has a fixed repayment term, an equity release policy isn’t paid off until the policyholder passes away.

You might be considering equity release if you’re short of cash or want to boost your retirement income, which could give you a higher standard of living.

But there are also many potential drawbacks to consider, such as reducing the inheritance assets of your family members. We’ll look at some of the main points to consider about equity release later in this guide, so you can work out if it’s the right option for you.

Equity release options

There are two key kinds of equity release policy - lifetime mortgages and home reversion plans.

Lifetime mortgages¹

This is the most popular type of equity release plan. With a lifetime mortgage, you’ll borrow a portion of your home’s value. This will usually be at a fixed or capped interest rate, and whether or not you make repayments depends on the type of policy you have.

For example, some older lifetime mortgages don’t let you make repayments, which means that the interest can stack up very quickly.

But other ‘drawdown’ policies let you pay back the interest through repayments, as well as letting you ‘release’ equity from your property gradually. This can have the advantage of helping you to control the interest due and manage the overall cost.

Lifetime mortgages are usually only available to people aged 55 and over.

Home reversion¹

The second type of equity release product is a home reversion plan. This is where you’ll receive a tax-free lump sum for a portion of your home’s value or ‘equity’. However, this is usually below the market value of the property.

You get the money to spend as you see fit, and you can continue to live in your home without paying rent until you die.

When the house is sold, the equity release provider (the lender) will receive the same share of the proceeds. If your home has increased in value since the policy was taken out, the lender could receive much more than the cash lump sum originally paid to you.

So, for example, if you receive 30% of the value of your £200,000 property from an equity release lender, you may get around £30,000. This should be £60,000, but remember that you’re getting below market value - as the lender may have to wait a long time to get their money back.

But after you die and your home is sold, the lender will get the market value. So if your property has increased in value to £300,000, they’ll get their share of 30% - which will be £90,000 at the full market value.

You’ll usually need to be over the age of 65 for a home reversion plan.

What is the interest rate on equity release?

The interest rate on lifetime mortgage equity release plans varies, depending on the lender and the policy. But generally speaking, **it’s between 3% and 5%**¹. This is much higher than many standard mortgages, and it can compound rapidly if you’re not making monthly repayments.

Other fees with equity release

As well as interest rates, many equity release plans also come with arrangement fees. This could include application fees, surveyors costs and fees for legal work, as well as general admin fees. The amount you’ll pay in equity release fees can vary, but it tends to be between £1,500 and £3,000¹.

Important things to consider before getting an equity release policy

There are lots of important costs, considerations and risks to weigh up with equity release, and it isn’t the right option for everyone. It’s a good idea to seek professional financial advice or speak to a mortgage broker before making a decision.

In the meantime, here are some key points to consider about equity release¹:

  • Equity release can be expensive and reduce the assets you can pass on to loved ones to inherit - it can also leave family members with a large bill to pay once you’re no longer around.
  • It’s recommended to only use companies that are part of the Equity Release Council - as members have signed up to a ‘no negative equity’ guarantee.
  • Downsizing to a smaller home could be a less risky way to unlock money from your property in retirement.

Accessing equity release in another country? Use Wise to save money

Equity release and lifetime mortgage products aren’t just available in the UK. If you’re planning to unlock money from a property in another country through equity release, here’s a handy money-saving tip.

Open a multi-currency Wise account and you can send and receive money internationally for small fees and the real, mid-market exchange rate. And with Wise, you can receive your lump sum or payments in your local currency, and convert or spend at the real, mid-market exchange rate.

Join Wise and start saving today


There’s a lot to get your head around with equity release, so it’s crucial to do your homework before signing on the dotted line. But hopefully after reading this guide, you should have a better idea of what equity release is and how it works. And remember - if in doubt, seek professional advice.


Sources used for this article:

  1. Money Saving Expert - equity release

Sources checked on 14th May-2021.


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