A guide to UK home equity release

Equity release involves using the equity in the family home to release funds, either by taking out a mortgage secured on the home or by selling part of the home. This could form part of a plan for retirement, but anyone considering equity release must take into account the pitfalls.

Lifetime mortgage

A lifetime mortgage may normally be taken out by individuals over a certain age, some arrangements requiring a minimum age of 55. Usually in an equity release arrangement involving a lifetime mortgage, a loan is made on the basis of equity in the home. No monthly repayments or interest payments are needed because the interest is rolled up with the mortgage and paid off when the house is sold. It should normally still be possible for the borrower to move house, provided that the new house meets the same requirements as the previous home for continuing the arrangement. The borrower should check the possibility of obtaining a guarantee that stipulates that, when the arrangement ends the borrower (or the borrower's estate) is not required to pay more money than is received for the sale of the property. An alternative way of using home equity to take out a mortgage is to arrange for a smaller release of funds at the beginning of the arrangement while retaining the possibility of accessing a reserve of funds that may be released as and when required by the borrower. Anyone considering this type of arrangement must take into account the applicable interest rate, which is likely to be rather higher than for other types of mortgage. Another very important consideration is that interest is charged on the whole outstanding mortgage including the rolled-up interest, so the interest charges may increase rapidly. If the mortgage is paid off early, there may be fees or penalties.

Equity reversion

Some of the equity in the home may also be released by the sale of part or the whole of the family home to a reversion provider. This gives the householder a lump sum, while allowing the seller to continue living in the home until their death or until they have to move out of the house for other reasons such as long term-care. As the householder may normally remain in the house rent-free under this type of arrangement, the amount received from the sale of part of the house to the reversion provider will be less than the market value, taking this rent-free accommodation into account. Normally, under this type of arrangement any money released to the householder would have to be used first to pay off any existing mortgage on the home.