4 little-known truths about equity release

EQUITY release isn’t a decision to be taken lightly, and to make a informed decision it’s important to understand how it works. As an adviser, these are four little-known truths I believe you should know. 

Equity release works differently to other forms of lending - like loans, credit cards, and mortgages since there is no requirement to make monthly payments. This means as some people learn about the features of the plans, they can misunderstand how it works. 

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It’s also a form of lending where some equity release companies  adhere to standards set by the Equity Release Council, not just the Financial Conduct Authority. These added standards are enforced to protect your interests as a borrower, and not many people know about these rules. 

So below the Equity Release Council standards and the truths and myths of equity release are explained in more detail. 

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What is Equity Release?

Equity release is a way of accessing money against the value of your home. It’s specifically available to homeowners aged 55 and older, and comes either as a home reversion plan or a lifetime mortgage. 

The lifetime mortgage is the most common form of equity release. 

With this arrangement, you have flexibility to repay the interest and some of the capital, up to a set limit. Early repayment charges may apply above a set value. There is no commitment to making payments but, be aware, if payments are not made, the interest will compound and the outstanding amount will continue to increase. 

Once you die or move into long-term care, your home will need to be sold and the original money released (plus any accrued interest) will be repaid to your lender. 

Four equity release truths

You should seek the advice of an equity release adviser before taking out this product. This can be a great opportunity to ask questions and your advisor will help you understand how it’ll impact your circumstances, if it’s right for you or if an alternative solution may be more suitable.

But, before you go into that meeting it’s helpful to have a good understanding of how it works and to iron out any misconceptions you may have. These are four truths about equity release you might not be aware of. 

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Truth number 1: You can leave an inheritance to your loved ones

Since equity release reduces the value of your estate, you may think you won’t be able to leave an inheritance.

However, equity release plans allow you to ringfence a portion of your home's value so you can pass part of it down as an inheritance to loved ones.

With a Lifetime Mortgage, which is secured against your property, you could choose a plan which includes the "inheritance protection" feature, although it's worth noting that this will reduce the amount you can release. 

The other type of equity release plan is a home reversion plan. With a home revision plan, you sell all or a share of your home, but you can continue living in it typically rent-free until you die or move into long-term care.

At that point the property would be sold and, if applicable, your percentage of the sale price will form part of your estate. 

Both options allow you to safeguard a proportion of your property's value to pass on to your heirs, whilst still enabling you to benefit from some of it now.

However, it’s worth considering it will impact funding long-term care. 

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Truth number 2 - You won’t owe more than your home is worth

With equity release, any money released plus accrued interest doesn’t need to be repaid until you pass away or move into long-term care, and at that point the sale of your property is likely to be enough to pay off the remainder of your loan.

You may have concerns that if house prices fall, the debt on your estate could amount to more than the property is worth. However, the no negative equity guarantee ensures this is not the case.

All equity release plans covered by the Equity Release Council come with this guarantee, meaning your estate will never owe more than your property is worth when it is sold.

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Truth number 3 - You don’t have to be retired to release equity

Equity release is popular among retirees for several reasons, including supplementing an income to maintain the lifestyle you have been used to.

But that doesn’t mean you have to be retired and it could be a solution for anyone aged 55 and over regardless of if you’re still in full time work or not.

The reasons for releasing money, which you will discuss with your advisor, can be far and wide.

You could use the money to enjoy luxury holidays, a new car or gifting to loved ones.

According to equity release broker Age Partnership the most popular reason for releasing equity in 2024 was to make home improvements.

As long as any existing mortgage is first repaid, which is a condition of equity release, the money is yours to enjoy.

Truth number 4 – You can continue to own your home with a lifetime mortgage and move in the future

The most popular type of plan is a lifetime mortgage, which allows you to maintain 100% ownership of the home you love.

You can also move home with your plan as long as your new property meets the requirements of your equity release provider, which your adviser will help you find out.

This feature must be included by all plans which meet the Equity Release Council product standards.

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Four equity release myths

In addition to these truths, these are four myths about equity release. 

Myth number 1 - You must make monthly repayments 

One of the main advantages of a lifetime mortgage is that it allows you to make flexible payments.

While this can help with managing your finances in retirement, remember that if you do not make regular payments to cover the interest, the interest will compound and the outstanding amount will increase.

You are required to repay the accrued interest, plus any money released, when you die or move into long-term care. 

Myth number 2 - You cannot release equity to pay off your mortgage

Some people enter retirement with a mortgage to still pay. Factoring regular monthly repayments into your monthly budget means you have less disposable income each month.

It is in fact a requirement of equity release that you must first repay any existing mortgage before enjoying the money you release. 

Using equity release to repay your mortgage  means you remove the commitment of monthly repayments and allows you to make flexible payments as and when you wish.

With a traditional mortgage you need to make every payment or you risk the bank repossessing your home.

But with equity release, there’s no required repayments or risk of repossession as any interest not repaid will be added to the loan. 

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Myth number 3 - You must pay tax on equity release

Equity release is a tax-free way of accessing your money. So, if you choose to have your money as an initial lump sum or release money on a regular basis, it won’t be subject to income tax at the point it is received.

If you do want to use equity release to mitigate inheritance tax, your equity release adviser will ask you to first seek specialist inheritance tax planning advice from and qualified financial adviser.

A financial advisor will ensure that you comply with current regulations and maximise the benefits for your estate and heir.

Myth number 4 - Lenders won’t take your health into account when deciding how much you can borrow

When making your equity release application, most lenders will consider more than just the value of your home. 

Like life insurance, they’ll likely want to get an understanding of your health and lifestyle. 

If you drink and smoke more than average, then you could end up being eligible to borrow more from your lender, if you require it. In addition, if you have an underlying health condition such as diabetes then this could increase the amount you can borrow too. 

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Summary and key takeaways

Equity release can be a complicated way of releasing money and it’s not suited to everyone. 

But if this is something you want to consider, then you need to get in touch with a trained professional to discuss your own circumstances. 

Age Partnership can provide these services where initial advice is provided for free and without obligation. Only if your case is completed would an advice fee of £1,995 be payable. Other lender and solicitor fees may apply.

Age Partnership is a trading name of Age Partnership Limited, which is authorised and regulated by the Financial Conduct Authority.

FCA registered number 425432. Company registered in England and
Wales No. 5265969. VAT registration number 162 9355 92. Registered address, 2200 Century Way, Thorpe Park, Leeds, LS15 8ZB.