What is Equity release and how does it work?

“Asset rich and cash poor” is a term frequently used when referring to older people. This usually refers to elderly people who own their house but do not have the cash to do the things they want to do. However, if you are over 55 years of age and own your own house, you can use equity release to unlock some of the value in your home. In this article, we will look at equity release and how it works.

How can you qualify for equity release?

You must be 55 years of age or older before you can qualify for equity release. In addition, you also need to own your own home either with no mortgage or with a mortgage that is lower than the amount you will borrow through equity release.

Most equity release schemes mean you do not need to make any repayment so that means the amount you borrow is not dependent on your income. What will determine the amount you can borrow through equity release is the value of your house.

How do equity release schemes work?

Equity release is a specialised lending area. The amount of the loan provided by the lender will be a percentage of the value of your house.

Most equity release schemes do not require you to make any re-payments. Any interest due will simply be added to the original amount you borrow until the house is eventually sold after your death or the death of your spouse or partner.

Is there any regulation of equity release schemes?

There is strict regulation of equity release schemes by the Financial Conduct Authority (FCA). A review was carried out by the FCA which was published in September 2023. It focused strongly on the needs of consumers.

In addition to FCA regulation, members of the Equity Release Council (ERC) who provide equity release loans, must sign up to a code of conduct. All member providers of equity release products must sign up to core product standards set by the ERC.

What types of equity release loans are there?

You must always remember that equity release is a loan. These loans can be structured differently depending on your circumstances. Also, not all equity release schemes approach the lending in the same way.

There are two main types of equity release schemes. The first is a lifetime mortgage and the second a home reversion plan.

Lifetime mortgages

If you take out a lifetime mortgage, you retain your ownership of your house. You have the option of paying the interest that accrues on the loan or allowing it to roll up and be added to the loan. You will be able to stay living in the house until the last of you or your partner dies or goes into long-term care. 

You should be aware that interest is compounded each year. That means that over the years, the interest that is added to your mortgage is based on the original amount of the loan plus the interest added each year.

Home reversion plans

With this scheme, you transfer ownership of all or part of your property to the equity release provider in exchange for the cash or regular payments. You also enter into a lifetime lease of the property. The lifetime lease guarantees you can continue to live in the property until the last of you or your partner dies.

There are also variations around these schemes. These are designed to give you the best possible options.

Before you can take out an equity release loan, you will need to take specialist advice on which of the available options are best suited to your circumstances.

Can you move house after taking out an equity release loan?

There are usually provisions allowing you to move house. The main provision is that the house you are moving to must be able to be sold on the open market.

What can equity release be used for?

There is no restriction on what you can use the cash generated by equity release for. Some people who have a very small mortgage will use equity release to pay off their existing mortgage and sometimes use the surplus cash for home improvements.

In other instances, people use equity release to pay for a holiday of a lifetime or to make a gift to children or grandchildren to help them buy their first home.

Because there are no restrictions on what you do with the money released through equity release, you can do anything you want with it.

What are the next steps?

If you are considering taking out an equity release loan, you need to take specialist advice. The advice on the types of schemes available can only be given by an authorised equity release adviser. You will also need a solicitor to deal with the legal work involved on your behalf. When you engage a solicitor to represent you, they will also check that the equity release scheme terms meet your needs.

Specialist property and conveyancing solicitors, North Berwick and Dunbar, East Lothian

Our solicitors specialise in providing advice and assistance to clients involved in buying, selling and re-mortgaging their properties. We also advise clients on the terms of equity release and assist in the legal work required.

If you are considering buying, selling, re-mortgaging or taking out an equity release loan, speak to us first We’re here to provide the clearest, independent advice possible and to keep your interests firmly in mind.