Equity Release? Is it the right option for me in 2025

Equity release products are financial solutions specifically geared towards individuals aged 55 and over. These products allow homeowners to access a portion of the cash that is tied up in the value of their property, enabling them to improve their quality of life without requiring them to move or downsize.

With equity release, homeowners can benefit from their property's increased value, which can provide them with funds for various purposes, such as home improvements, travel, or supplementing retirement income. This arrangement can be particularly appealing to those looking to enjoy their later years without the stress of financial constraints.

The funds released through these products come in the form of a loan, which typically does not require monthly repayments. Instead, the loan amount, along with any accrued interest, is repaid through the sale of the property once the homeowners either pass away or transition into residential care.

It's important for individuals considering equity release to fully understand the implications and seek professional financial advice to ensure it aligns with their long-term plans.

Understanding the advantages of using equity release

Equity release offers several benefits, including access to tax-free cash that you have accumulated in your home, the ability to remain in your home, and the peace of mind that comes from not having to make any repayments until you pass away.

Below, we will explore these advantages in more detail.

• You can get tax-free cash now

The cash you receive from an equity release product is not subject to income or capital gains tax, which means you keep all of it and can spend it freely. However, depending on how you use that cash, it could become taxable later on. For instance, if you deposit some of the cash into an interest-earning savings account or invest it in a general investment account, you may be liable for tax on any interest or gains you earn.

Nevertheless, the initial lump sum you receive is tax-free, and with careful planning and the use of tax-efficient accounts like ISAs, you can help maintain that tax-free status.

• You can live in your home until you die or go into care

In addition to receiving tax-free cash that you can use immediately, you can also continue living in your home for as long as you want, even until you pass away or require long-term care. This means you won’t have to worry about downsizing or leaving your home if you enjoy living there.

• You don't need to make any repayments until you die

The money you owe will be paid from the proceeds of your property sale after you pass away or enter long-term care. This means you don’t need to worry about paying off the interest (unless you choose to) or any of the loan itself while you’re still alive. As a result, you can enjoy the money you receive from the equity release product without worrying about future implications.

However, it’s important to remember that by doing this, you are effectively reducing the size of your estate, which means your family and friends may receive a smaller inheritance when you die. Depending on your situation, this could be a significant concern.

Considering these benefits, equity release may appear to allow you to "have your cake and eat it too." You can remain in your home and benefit from its appreciation. That said, it may not be suitable for everyone, so it's crucial to understand the potential downsides of equity release before making a decision.

Understanding the disadvantages of equity release

Some disadvantages of equity release include the effects of compound interest on the loans, receiving less than the full value of your home, potentially losing entitlement to means-tested benefits, and incurring significant upfront costs to set up the product. We will discuss these issues in more detail below.

• Lifetime mortgages mean compound interest for life

  
  

A lifetime mortgage is a financial product that allows you to borrow money against the value of your home. Unlike traditional loans, this type of mortgage does not require you to make monthly repayments. Instead, the interest on the loan accumulates over time, building up year after year. This compounding effect can lead to a substantial increase in the total amount of debt you owe, which must be settled when your home is eventually sold—either after your death or if you move into a care facility.

To illustrate the impact of compound interest more clearly, the table below provides a detailed example. It is based on a scenario where you borrow £50,000 at an interest rate of approximately 5.8%.

Year	Interest Added	Compound interest at 5.8%
0	£0.00	£50,000
5	£16,278	£66,278
10	£39,351	£89,351
15	£66,480	£116,480
20	£104,412	£154,412

As of January 2025, equity release interest rates in the UK range from 5.8% to 6.43% influenced by various factors such as your age, health, and the value of your property.

Example equity release rates as at January 2025 are:

• Aviva: 6.43% MER

• Pure Retirement: 5.90% MER

• Just Retirement: 5.95% MER

• LV: 5.94% MER

  
  

All equity release products decrease the value of your estate, and not paying any interest can have a significant impact. For example, a £50,000 loan could cost an additional £104,412 over 20 years, depending on the interest rate due to compound interest.

One way to mitigate this is by paying some or all of the interest on the loan. This effectively turns your lifetime mortgage into an interest-only mortgage. If you choose to pay off all the interest, your beneficiaries will only need to repay the original loan amount when they sell the home. Alternatively, if they have the financial means, they can repay the amount owed without selling the property, allowing them to keep it in the family.

• Home reversion plans only pay 20% to 60% of the value of your home

  
  

A home reversion plan offers a unique way to access the equity in your home by allowing you to sell a portion of your property to a home reversion provider. In this arrangement, you receive a lump sum payment for the share of the home you’ve sold, but it’s important to note that you will typically receive only 20% to 60% of your home’s current market value, which reflects the percentage of the property you are relinquishing.

Once you enter into this agreement, you can continue living in your home without paying rent, even though you have sold part of your ownership. This means you can enjoy the familiar comforts of your residence without any immediate financial burden related to your shared ownership.

However, it’s essential to understand that this arrangement comes with a trade-off. While you can stay in your home, the amount you receive from the sale is less than the full market value of the property. This effectively means you are still contributing to the cost of living in your home, as you are not reaping the complete financial benefits of your property's value.

• The money is tax-free but it does count towards your income for benefits purposes

  
  

If you are on any means-tested benefits, a payout from an equity release product can mean that your benefits are halted. The payout will be tax free but it will count towards your assets for benefits purposes. Some of the benefits that could be affected by an equity release

product include:

• Universal credit

• Council tax discounts

• Pension credit (paid to some state pension recipients)

  
  

Your state pension will not be impacted because it's not a means-tested benefit.

There are upfront costs to consider

Setting up an equity release product involves various upfront and ongoing costs that you need to budget for. These costs include:

• Product Set-Up Fees: The product you choose will typically come with arrangement fees. Equity release set-up fees can range from £1,000 to £3,000 and include legal, financial, and valuation fees.

  
  

• Mandatory Financial Advice: It is a requirement by the Financial Conduct Authority (FCA) to obtain advice from an equity release advisor before you take out a product. This ensures that you fully understand the implications of the product. These fees vary depending on your relationship with your adviser.

  
  

• Interest (Optional): If you opt for a lifetime mortgage, your loan will accrue interest for as long as you live in your home. This interest will compound over time, potentially leading to a significant amount that will need to be paid from the sale of the property. To leave a larger inheritance for your family, you may choose to repay the interest.

  
  

Is equity release right for you?

Equity release can serve as a beneficial financial option for certain individuals under specific circumstances. For instance, if you find yourself reluctant to downsize your home or take the route of remortgaging, equity release can provide a viable alternative by enhancing your retirement income. This financial strategy may be particularly appealing for those who do not intend to leave an inheritance to their family members, allowing them to enjoy their assets during their lifetime.

However, choosing equity release is not a decision to be taken lightly, as it may not be the best fit for everyone. Before proceeding with equity release, it is essential to explore other alternatives, such as downsizing, renting out a room, or seeking financial advice on managing your assets.

Additionally, equity release involves significant financial implications, including the potential impact on your estate and the increase of debt against your property. It's crucial to understand the terms and conditions of equity release schemes, such as the costs involved, any potential effects on means-tested benefits, and how it could influence your options for future care needs.

Given the complexity and long-term consequences of such financial endeavours, it is advisable to consult with a financial advisor or a specialist in equity release to ensure that you make an informed and prudent decision tailored to your circumstances.

Is there a better alternative to equity release?

In some situations, alternatives to equity release, such as downsizing and remortgaging, may be more suitable for your needs. For instance, if you have a large family home where you raised your children, you may find that you no longer need all that space in retirement. By downsizing to a smaller property, you can free up some cash while still owning your home outright, which allows you to pass it on to your family when you pass away.

Remortgaging is another option. It involves borrowing more money against your home. If you want to continue living in your house but plan to make an extension, a remortgage can help fund your project. However, keep in mind that you will need to repay the loan along with any accrued interest. This approach is only advisable if you need a lump sum now but are able to repay it in instalments later on.

Drawbacks when using equity release

One of the main downsides of equity release is the compounding interest associated with lifetime mortgages. The interest accumulates for as long as you live in the property and until the loan is paid off. Depending on your initial loan amount, the duration of the loan, and the interest rate secured, this can result in hundreds of thousands of pounds added to your debt in interest. However, as mentioned earlier in this article, there are ways to mitigate this impact by paying off some or all of the interest, effectively treating the product like an interest-only mortgage.

Another significant downside of equity release is its potential impact on your eligibility for means-tested benefits. Although the money you receive from equity release is tax-free, it will still be considered as part of your assets when assessing your entitlement for certain benefits, such as Universal Credit and Pension Credit.

An additional drawback of equity release is the potential risk of entering negative equity.

Negative equity is when the amount you owe your mortgage lender is more than the value of your property. The most common cause of negative equity is falling house prices.

This situation can arise when the amount owed on your lifetime mortgage exceeds the value of your home at the time of sale. When you choose to release equity through a lifetime mortgage, you enter into an agreement that requires you to repay the loan, along with any accrued interest, from your estate once you pass away.

Typically, real estate values trend upwards over time, which means that when the time comes for your home to be sold, it is likely to sell for a price higher than the amount you owe on the mortgage. In this scenario, the lender will claim their dues from the sale proceeds, and any remaining funds will be distributed to your beneficiaries as an inheritance.

However, there is a possibility, albeit rare, that your property could decrease in value, or that the funds obtained from the sale may not be sufficient to cover the outstanding loan amount. If this happens, your estate could potentially face negative equity, meaning that the debts exceed the assets.

Fortunately, the vast majority of equity release products include a "no negative equity" guarantee.

This crucial feature ensures that the lender cannot seek repayment from the remaining assets of your estate, even if the sale of your property does not meet the value of the loan. Consequently, your beneficiaries will not inherit any debt from the equity release.

It is essential to understand, however, that while this guarantee protects your estate from additional financial obligations, it also means that you will not be leaving any part of your home to your beneficiaries. The entire sale proceeds will be directed toward repaying the loan, leaving nothing for inheritance purposes. This balance between accessing funds during your lifetime and the implications for your heirs is a critical consideration for anyone contemplating equity release