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 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 types of equity release available to homeowners aged 55 or over. Here's how they work:

Lifetime mortgages
A lifetime mortgage is a loan secured against your home and you keep full ownership without having to move. The funds are provided to you via a lump sum or smaller, regular withdrawals following an initial release. When the last remaining borrower dies or goes into care, the house is typically sold to repay the plan. 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. Unless you choose to do so, there are no repayments to make on a lifetime mortgage until the plan comes to an end. The loan, plus compound interest, is typically repaid through the sale of the property when the last remaining applicant passes away or moves into long-term care.

• 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. However, a drawdown facility is not guaranteed and future drawdowns are subject to the prevailing interest rate.

Home reversion
This involves selling part or all of your home to a reversion company. You no longer legally own the property, and you'll need to insure and maintain it. In return, you get a lump sum. If you don’t sell all of your property, you can also ring-fence part of the future value of the property - say, for inheritance.
 

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 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. As a part of our advice process, we’ll consider whether retirement interest-only (RIOs) and other mortgages may be suitable and can arrange advice on these if appropriate. Advice fee will vary.
2. Valuation and offer - If you choose to proceed, the adviser will need to fill in an application form on your behalf. After that's complete, an independent RICS surveyor will assess your property and provide a valuation for equity release purposes, the results of which will determine whether an offer is made. They'll send the offer, as well as the terms of the equity release product, to you and your solicitor. Your solicitor will arrange a meeting with you. They must provide independent legal advice as part of the process and they must also witness the signing of the documents. Once you've received the offer, you can choose whether to accept it.
3. Equity release payment – Once any special conditions have been satisfied, your case will complete and the equity release provider will send the money to your solicitor, who will transfer the funds to you, allowing you to start using it for the things that matter to you.

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.

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 to repay existing debt.

All our equity release advice relates to lifetime mortgages - a loan secured against your home. 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.

A lifetime mortgage may result in limited or no property equity remaining and will reduce your financial options in the future.

Our fixed advice fee of £1,699 is only payable on completion of a plan.