How does equity release work?

If you're thinking about your retirement, chances are that you've heard of equity release. This form of borrowing helps you to borrow against the value of your home - its equity - in order to do more of what you want to do.

That might simply be paying off your existing mortgage or other debts, helping out those close to you, or adapting your home to later life.

In this guide, we look at how equity release works in the UK, including the main types and plans, a step-by-step explanation of how it works in practice, and some frequently asked questions regarding how different aspects of it work.

What are the main types of equity release and how do they work?

There are two key types of equity release available to homeowners. Here's how they work:

Lifetime mortgages

Here, a lifetime mortgage is taken out on the property that's your main residence, while you keep full ownership of it. The funds are provided to you via a lump sum or smaller, regular withdrawals following an initial release. When the final borrower dies or goes into care, the house is sold to repay the plan.

Home reversion

This involves selling part or all of your home to the provider. You no longer own part or all of the property, and you'll need to insure and maintain it. In return, you get a lump sum. You can also ring-fence part of the future value of the property - say, for inheritance.

With a lifetime mortgage, there are two ways of receiving the money:

• Lump sum lifetime mortgage - This form of equity release involves borrowing money against the value of your property (equity), and receiving a single, tax-free lump sum from your equity release provider. Interest accrues on the amount borrowed and is repaid when your house is sold.
• Drawdown lifetime mortgage - Also known as drawdown equity release, this involves being paid funds in a single smaller lump sum, with the rest of the money being held in a pot from which you can draw as and when you need it. Interest only accrues on the funds you release, which can reduce the cost of the lifetime mortgage if you don't need to use the money right away.

Step by step, how does equity release work?

Equity release usually works across a three-step process:

1. Advice and application - You need to get financial advice from an equity release adviser prior to making an application to an equity release provider. That way, you can understand whether it's the right product for you, how much it'll cost, and whether other options, like downsizing or using savings, might be a better option. Our calculator can give you an idea of cost, too.

Once you know that you would like to pursue equity release, get in touch with an equity release adviser and discuss the type of equity release that's right for you.

2. Valuation and offer - If you choose to proceed, you'll need to fill in an application form.

After that's complete, the provider will perform a valuation on your property, the results of which will inform their offer. They'll send this, as well as the terms of the equity release product, to you and your solicitor.

3. Equity release payment - Once you've received the offer, you can choose whether to take it.

If you wish to, the equity release provider will send the money to your solicitor, who will give it to you as per the terms of your equity release product: in a lump sum.

Equity release with Key

Unsure whether equity release is for you, or how it will work according to your specific circumstances? Call our team now or request a callback to talk to one of our helpful advisers today.

Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits. You should think carefully before securing a loan against your home.

Key Equity Release offers lifetime mortgages only, which is a loan secured against your home. Lifetime mortgages are the most popular form of equity release. With a lifetime mortgage there are typically no monthly repayments to make as the loan, plus roll up interest, is repaid when the plan comes to an end.

Our equity release advice relates to our range of Key branded products only, which are all lifetime mortgages and our fixed advice fee of £1,299 is only payable on completion of a plan.