Later Life Lending Guide

How Does Equity Release Work?

Equity release allows homeowners aged 55 and over to access the wealth tied up in their property as a tax-free lump sum or regular income, without selling their home.

Important: Equity release is a long-term commitment and will reduce the value of your estate. It may affect entitlement to means-tested benefits. Independent financial and legal advice is required. All plans recommended are from Equity Release Council approved lenders. Your home may be repossessed if you do not maintain required payments on a secured loan.

4 min read

This guide explains the two main types of equity release, how interest works, how repayment works, and the legal protections that apply to all Equity Release Council approved plans.

The two types of equity release

There are two forms of equity release in the UK:

A lifetime mortgage is a loan secured against your home. It is the most common form - approximately 95% of all equity release plans are lifetime mortgages. You remain the legal owner of your property. The loan and accrued interest are repaid when the property is sold - either after you die or after you move into long-term care.

A home reversion plan involves selling a percentage of your property to the plan provider in exchange for a lump sum or regular income. You retain the right to live in your home for the rest of your life, rent-free. When the property is eventually sold, the provider receives the percentage they purchased.

How interest works on a lifetime mortgage

Most lifetime mortgages use "interest roll-up" - the monthly interest charge is added to the loan balance rather than paid monthly. The balance therefore grows over time.

Example: a £100,000 lifetime mortgage at 5.5% AER will grow to approximately £117,000 after 3 years, £170,000 after 10 years, and £290,000 after 20 years - assuming no repayments.

Some lifetime mortgages allow optional monthly interest payments - preventing roll-up. You are not obliged to make these payments, but they keep the balance constant.

All rates quoted are annual equivalent rates (AER), which account for compounding.

How repayment works

A lifetime mortgage is repaid when:

You (and any joint applicant) die
You permanently move into long-term care
You sell the property

At that point, the property is sold and the outstanding balance (original loan plus accrued interest) is repaid to the lender. Any remaining equity passes to your estate.

You cannot be forced to leave your home during your lifetime - you have a contractual right to remain regardless of how the loan balance grows.

Equity Release Council protections

All plans recommended by FCA-regulated advisers to ERC-approved lenders carry the following protections:

No negative equity guarantee: you will never owe more than the value of your property
Right to remain: you cannot be evicted from your home during your lifetime
Portability: you can move your plan to a new property (subject to lender criteria)
Fixed or capped rates: interest rates cannot increase above the rate agreed at the outset
Independent legal advice: required before any plan completes

These protections are legally binding and are not optional features - they are conditions of ERC membership.

The role of independent advice

FCA-regulated equity release advice is a legal requirement - you cannot take out a lifetime mortgage or home reversion plan without receiving regulated advice from a qualified adviser.

The role of the adviser is to:

Understand your full financial situation and objectives
Compare equity release against alternatives (downsizing, RIO, standard remortgage)
Compare all relevant ERC-approved plans from across the market
Present a personalised Key Facts Illustration for the recommended plan
Ensure you understand the plan before signing

Independent legal advice from a solicitor is also required before the plan completes.

FAQs

Frequently asked questions

Is equity release the same as selling my house?

No - a lifetime mortgage is a loan secured against your property. You retain ownership throughout. With a home reversion plan, you sell a percentage of the property - but retain the right to live there for life. You are not selling your whole home under either product.

How quickly does the interest grow?

At 5.5% AER, the balance doubles approximately every 13 years. At 6% AER, it doubles in approximately 12 years. Drawdown plans (where you take money only when needed) and optional interest payments both reduce the effective roll-up rate.

Can I repay equity release early?

Yes - but early repayment charges (ERCs) typically apply if you repay within a set period. Some plans offer fixed ERCs (e.g. 5% in year 1, declining annually). Others use gilt-indexed ERCs. Downsizing Protection allows ERC-free repayment in specific circumstances after 3 years.

What happens if I die shortly after taking equity release?

The property is sold and the equity release balance is repaid to the lender. Any remaining equity passes to your estate. The estate cannot owe more than the property value - the no negative equity guarantee applies.

Can both spouses be on an equity release plan?

Yes - joint plans are the most common structure for couples. The repayment event is triggered only when the last remaining borrower dies or moves into care - so the surviving partner can remain in the property throughout their lifetime.

Speak to our later life lending specialists

Call 0204 6211776 · Whole-of-market advice across all later life products · FCA No. 814533

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