How and when to use equity release

Equity release allows you to access the money tied up in your property without moving home. It’s a financial solution available to homeowners, typically over the age of 55, that’s remained popular over the years. But if you are considering it, tread carefully. 

“It can be a useful tool for older homeowners who are asset-rich but cash-poor, but it should never be seen as ‘free money’. The interest rolls up quickly, which can significantly erode the value of an estate over time and reduce the amount left to beneficiaries,” says Ian Futcher, a financial planner at Quilter.

A general rule of thumb in financial planning is that you should pay off your debts as you get older. Equity release can feel counterintuitive as it goes against this principle.

But rising property prices, especially in relation to frozen inheritance tax (IHT) thresholds, have brought it into consideration for more people. Matt Conradi, head of advisory at Netwealth, says: “I would challenge yourself with ‘Why?’ If you have an expensive primary residence that is your main asset and you really don’t want to move, that could be a starting point.”

Owner-occupiers aged 60-plus now hold a record estimated £2.9tn of net housing wealth in homes worth a total of £3tn, according to property consultancy Savills. But the main IHT nil-rate band has been frozen at £320,000 since April 2009-10, with Rachel Reeves recently extending this freeze until April 2030. 

Downsizing is the obvious alternative, and sometimes it’s a good solution, for example if it lets you move to a more manageable property closer to family. But in reality, it is not always practical. Only 19 per cent of people said they would consider downsizing their home in retirement, according to independent research conducted for Hargreaves Lansdown in October 2025. 

“In many parts of the country, smaller properties in the same area can still be very expensive, and moving away from friends, family and established support networks can have a real impact on wellbeing in later life,” Futcher says.

How equity release works

Equity release once carried a more negative reputation, but the industry has undergone a significant transformation and is now regulated by the Financial Services Authority. Meanwhile, industry body the Equity Release Council (ERC), which represents more than 180 firms and more than 500 individuals, oversees guarantees, standards and safeguards to protect consumers.

Plans that meet the ERC’s standards come with six product safeguards. These include the no negative equity guarantee and the right to remain in your home for life. 

In November, it introduced a new vulnerability guidance hub for members. Kelly Melville-Kelly, director of risk, policy and compliance at the ERS, says: “Every customer has a story. For some, later life lending is a positive step towards new opportunities; for others, it comes at a time of change or challenge.”

There are two main types of equity release scheme available: lifetime mortgages and home reversion plans. To qualify for either you need to be a homeowner, and the youngest applicant normally needs to be aged at least 55 years old to qualify.

You can usually release between 20 per cent and 60 per cent of your property’s value. Generally, the older you are, the higher the percentage of your property’s value you can access.

Lucie Spencer, financial planning partner at Evelyn Partners, says: “As equity release is based on the property value rather than income, there are no formal affordability tests as there would be with a standard mortgage.”

Lifetime mortgages make up more than 99 per cent of the market, according to the ERC. This option allows you to retain full ownership of your home. 

With a lifetime mortgage, you can either borrow a lump sum or access the funds more gradually in a drawdown facility, which is secured against the value of your property. 

You don’t need to make repayments unless you choose to, but the interest compounds over time, which can significantly increase the total amount owed. The loan, along with any interest accrued, is typically repaid when you die or move into long-term care.

A home reversion plan involves selling a portion of your property to an equity release provider and receiving a lump sum or regular income in exchange. You then continue to live in your home rent-free, for the rest of your life. 

With both options, any equity you release from your home is tax-free. However, if you choose to invest the money, any interest you receive may be taxable and may affect your tax position. 

Financial support for your family 

There are myriad things you could do with cash released via equity release, but one popular option is to provide financial support for your family. 

Now pensions are being brought into IHT considerations, advisers say some are looking to use equity release to help pass more to the next generation. “The lump sum can be gifted to family members and, provided you live for seven years, will fall outside your estate for IHT purposes,” Spencer says.

However, HMRC may still deem IHT is payable on gifts funded by equity release, if you pass away before seven years has passed. “If gifts are made and the individual does not survive seven years, they will be treated as failed potentially exempt transfers (or failed chargeable lifetime transfers if paid into a discretionary trust), meaning IHT could become payable,” Spencer adds. 

You also need to be careful about how equity release affects the residence nil-rate band for IHT (£175,000 per person) that applies to your property. The property’s value at death is calculated as the market value minus the equity release balance. If equity release reduces the property value below the RNRB then you would not receive the full benefit of the additional relief.  

For example, if your home is valued at £600,000 and you have a £300,000 equity release (including interest), the net value of your property would be £300,000. This is lower than the £350,000 available to a couple, meaning you therefore lose £50,000 of the nil-rate band for inheritance tax planning purposes. 

Families nevertheless worry that the bottom rung of the housing ladder just keeps moving up – making the starting point a little further out of reach for first-time buyers. Andy Vickery, a specialist equity release adviser with Money Release, says: “It can be great to help your beneficiaries at a time when they most need it, rather than waiting until an inheritance.”

UK Price Index data shows the average first-time buyer house price was £229,000 in November. The average is now £11,450 for a 5 per cent deposit and £22,900 for a 10 per cent deposit. 

Paying for a grandchild’s education might be another reason to release equity and can be a sensible way to meaningfully assist your cash-strapped children at a time when they need it most. 

Navigating potential complications 

There are, however, several downsides to consider. An important factor to be aware of is early repayment charges. If you decide to repay your equity release loan earlier than agreed, you may face substantial early repayment charges.

Compound interest is a key issue. “When interest rolls up, the amount owed on the eventual sale of the property could be significantly higher than initially expected,” Spencer says. 

Money Release equity release advisers say current headline lifetime mortgage rates start from around 6.25 per cent for standard plans, with lower rates available if borrowers service the interest. 

But Conradi warns: “That 6 per cent compound interest adds up quite fast.”

In fact, equity release interest compounds faster than a residential mortgage. Residential mortgages typically use the monthly equivalent rate (MER), as you are paying at least the interest each month. But equity release uses the annual equivalent rate (AER). The MER is typically lower than the AER because the latter accounts for the interest on interest (compounding), making the true annual cost higher than just the stated monthly rate. 

Money Release says the monthly interest serviced payment is £535 for a £100,000 loan at 6.42 per cent MER.

With a lifetime mortgage, if you don’t pay the interest each month, it compounds, as most lenders calculate interest daily and add it to the loan monthly. Therefore, if you don’t pay the interest, Money Release says they would use the 6.61 per cent AER for the £100,000 loan, meaning that £6,610 interest would be charged in the first year. Then in year two, the interest charged will be based on the new total of £106,610 (the initial principle released plus the previous year’s interest).

It is also important to remember that equity release involves set-up costs, including financial advice, valuation and legal costs. Independent equity release advisers Bower Home Finance charge a typical advice and administration fee of £1,695. Legal & General reports equity release solicitor fees are typically around £860.

The solicitor’s role is to ensure you fully understand the legal terms of the agreement, and to safeguard your interests, particularly if you have others living in the property or dependants who could be affected. Working with a solicitor who is registered with the ERC can offer added peace of mind. 

To proceed, you also need to take advice from a qualified adviser. Some advisers are ‘tied’ to one specific lender and can only offer that provider’s products. Others operate on a ‘panel’ basis, offering a limited range of products from a select group of lenders.

It’s best to seek whole-of-market, independent advice from a specialist equity release adviser who is a member of the ERC. That ensures you’ll receive impartial guidance and benefit from the council’s strict consumer protections. A whole-of-market independent adviser can also discuss alternatives, such as retirement interest-only mortgages or traditional mortgage options, to ensure you make a fully informed decision.

Also look for qualifications that signpost expertise, such as the Certificate in Regulated Equity Release from the London Institute of Banking and Finance, or the Certificate in Equity Release from the Chartered Insurance Institute.

In the context of the 100-year life that many can now expect to live, many worry about the cost of long-term care. Advisers warn that equity release could end up being a burden if you live a long time. Conradi says: “Your home can be your insurance policy for living longer. If you give it away, you don’t cover the risk of living longer.”

So it’s important to discuss all your options, preferably with family too, before making a decision.