Equity release: what’s behind its growing popularity?

MoneyPlus Features Team

Equity release is an increasingly popular way of unlocking wealth tied up in your home to spend how you want to, such as helping to fund your retirement. We explain what it is and how it works, and tackle some misconceptions.

Things are definitely changing when it comes to how people fund their lives when they head into ‘retirement’.

Partly, this is due to pension freedoms which normally allow you to access your pension savings, currently from the age of 55, if you want to. And that can free you up to work less, pursue a different career, turn hobbies into a new income stream, or whatever you choose.

Some people choose to downsize their home, some have Individual Savings Accounts (ISAs) or invest in property – and then there’s the State Pension, although the age at which you can get it is rising, reflecting the fact that more of us are living longer. It’s 65 now for all, will reach 67 by 2028 and it could go higher still.

Read more about ways to fund your retirement here.

These ways of funding how you live life in your 50s, 60s and beyond are being joined by equity release, which has seen a surge in interest in the last few years thanks to property booms across many parts of the UK. The result is many people approaching retirement have considerable wealth tied up in their homes.

A report from the Equity Release Council has revealed that “50p of housing wealth was unlocked for every £1 of flexible pension payments during 2018, as property wealth plays an increasing role in funding later life”.

Supporting this, trade body UK Finance’s recent figures show lending by equity release specialists rose £800 million between 2017 and 2018, with 42,866 new equity release loans made to the over 55s.

Why is equity release becoming so popular

What’s driving this trend? There has been an increase in the number of equity release products available as well as improved interest rates.

Another is the fact that many people in the UK might be ‘property rich’, but want or need more than they have saved to enjoy the lifestyle they want. And with more people living longer, there are, on average, more years to fund.

Then there’s that rise in the State Pension age, with longer to wait for it.

Or perhaps people simply want to support family members but find their money is tied up in bricks and mortar or other investments.

How does it work?

There are different types of equity release which over-55s can apply for to take cash out of their home, tax free, minus any outstanding mortgage.

  • lifetime mortgage allows you to continue to own your home after releasing money from it: the loan plus interest needs to be repaid on death or an earlier move into long-term care.

  •  Another is a home reversion plan where you sell some or all of your home to get a lump sum. 


Important things to think about

Equity release is still relatively new and anyone thinking of doing it needs to be aware of how it works before considering it.

It requires paying off any existing mortgage, for example. Any money released, plus accrued interest would need to be repaid upon death, or a move into long-term care.

And it can affect the amount of inheritance you can leave and your entitlement to any means-tested benefits, now and in the future, as it gives you a lump sum of capital.

Equity release is not suitable for everyone, and there may be alternate options available. It’s a big decision and it’s important you take some professional financial advice first.

Tackling some common misconceptions

1. You won’t be able to protect your inheritance

You can. Depending on the type of plan you choose, you’ve the ability to protect a part of your property’s value, meaning you still leave something for your loved ones, although this will reduce the amount that you’re able to borrow.

2. Do you need to move home?

You don’t. If you choose to take out a lifetime mortgage you can release equity from your home without having to call in a removal firm. By doing so, you still continue to own your entire home and you’ll still benefit fully from any future increase in its value, although interest will be charged on the loan amount.

3. And will you be taxed on the money you release?

You won’t. When you unlock wealth from your house, the equity released is tax-free regardless of whether you take it as a lump sum or as smaller amounts over time.

However, if you put it into a savings account or investments, you may have to pay tax on any growth.

4. Will you pass on that debt with your estate?

No, you don’t. The good news here is you’ll have a “no negative equity guarantee”. This means when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay more.

Where to find out more

The Government’s Money Advice Service has a comprehensive guide to equity release. You can download it from here, visit the Equity Release Council website for more information or read more on our website.

Tax and legislation may change and the information here is based on our understanding in August 2019. Your own circumstances will have an impact on tax. This article shouldn’t be taken as financial advice.