Equity Release Mortgage: How It Works, Costs and Risks: An equity release mortgage allows an eligible homeowner to borrow against the value of their home in later life.
Unlike a standard residential mortgage, the loan may not require regular monthly repayments. Instead, interest can be added to the balance. The mortgage is normally repaid when the last borrower dies or moves permanently into long-term care.
That apparent simplicity can hide a long-term financial commitment.
An equity release mortgage exchanges some of the future value of your property for money today. Therefore, the decision should consider more than the amount available. It should also consider interest, inheritance, future housing needs, benefits and alternative borrowing options.
At a Glance
- An equity release mortgage is normally a lifetime mortgage secured against your home.
- It is generally available to homeowners aged 55 or over, subject to provider criteria.
- You retain ownership of your property.
- You may take a lump sum, arrange a drawdown facility, or combine both.
- Monthly repayments are not always required, although some plans allow or require payments.
- Unpaid interest is added to the mortgage and may compound.
- The mortgage is normally repaid after death or a permanent move into long-term care.
- It will reduce the equity remaining in your property.
- It could affect inheritance, benefits and future financial choices.
- Specialist equity release advice is required before proceeding.
What is an equity release mortgage?
An equity release mortgage is a loan secured against the home of an older homeowner.
The most common form is a lifetime mortgage. You continue to own your property and can usually remain there for life, provided the mortgage conditions are met.
The money released can normally be taken as:
- A single lump sum
- Smaller withdrawals through a drawdown facility
- A combination of an initial amount and later withdrawals
- Regular income-style withdrawals, where available
Although the released money is normally tax-free, using or retaining it may have tax, benefit or estate-planning consequences.
The term “equity release mortgage” is sometimes used broadly. However, it usually refers to a lifetime mortgage rather than a home reversion arrangement.
Our main equity release guide explains the wider category and how its main product types differ.
Is an equity release mortgage the same as a lifetime mortgage?
In most consumer discussions, an equity release mortgage is understood to mean a lifetime mortgage.
A lifetime mortgage is secured against your property, but ownership remains with you. By contrast, a home reversion plan involves selling part or all of the property to a provider.
That ownership distinction is fundamental.
With a lifetime mortgage, the amount owed grows in line with the loan terms. With home reversion, the provider owns the agreed share of the home and benefits from that share when the property is sold.
Homeowners comparing both structures can read our separate explanation of home reversion plans.
How does an equity release mortgage work?
The process usually begins with an assessment of the homeowner, the property and the purpose of the borrowing.
The provider may consider:
- The age of the youngest applicant
- The property’s value
- The property type and construction
- Its condition and location
- The amount already secured against it
- The requested loan
- Health or lifestyle information
- The provider’s minimum property value
- The chosen payment or drawdown structure
Any existing mortgage will normally need to be repaid when the equity release mortgage completes.
For example, a homeowner might release £80,000. Part could repay an existing interest-only mortgage. The remainder could fund repairs or remain available through a drawdown facility.
The loan is registered as a legal charge against the property. It normally remains in place until a specified repayment event occurs.
Our guide to how equity release works explains the wider application and completion journey.
How is interest charged?
An equity release mortgage usually charges interest on the money borrowed.
Where no monthly interest is paid, the interest is added to the mortgage balance. Future interest may then be charged on both:
- The original amount borrowed
- The interest already added
This is compound interest.
Suppose someone borrows £50,000 at a fixed annual rate of 6%, with no repayments. The balance would not simply increase by £3,000 every year. Each later interest calculation would be based on the growing balance.
The actual calculation depends on the provider, rate and mortgage terms.
This means duration can matter as much as the initial interest rate. A loan held for many years may grow substantially, even when the original release appears modest.
Can you make repayments?
Many lifetime mortgages allow voluntary repayments, subject to the provider’s conditions.
Depending on the product, a borrower may be able to:
- Pay some or all of the monthly interest
- Make occasional capital repayments
- Pay a set percentage without an early repayment charge
- Stop voluntary payments if circumstances change
- Reduce the rate at which the balance grows
However, not every product works in the same way.
Some newer lifetime mortgages require payments for an agreed period. Missing compulsory payments could have serious consequences, potentially including repossession.
The difference between optional and mandatory payments must be understood before an application is made.
The Equity Release Council explains that product safeguards and payment conditions vary between plan types. Its lifetime mortgage information provides further consumer guidance.
What is a drawdown lifetime mortgage?
A drawdown lifetime mortgage provides an initial release and a reserve for possible future use.
Interest is generally charged only after money is withdrawn. Therefore, leaving funds in the reserve may reduce the total interest compared with taking the full amount immediately.
For example, a homeowner who needs £20,000 now and perhaps £30,000 later may not need to borrow £50,000 on the first day.
However, future withdrawals are not always guaranteed on identical terms. They may depend on:
- The provider’s conditions
- The remaining reserve
- Minimum withdrawal amounts
- Product availability
- Additional checks
- The terms agreed at outset
Drawdown can provide flexibility, but it still requires a clear long-term plan.
How much could you release?
The amount available is generally based on a maximum loan-to-value percentage.
Older applicants may be offered a higher percentage because the expected mortgage duration may be shorter. Certain health conditions may also support an enhanced lifetime mortgage, subject to assessment.
The available amount can also be affected by:
- Property value
- Property construction
- Flood or environmental risks
- Lease length
- Existing secured borrowing
- Property condition
- Location
- Provider criteria
A high theoretical maximum does not mean borrowing that amount is suitable.
The correct question is not simply, “How much can I release?” It is also, “How much do I need, and what could it cost over time?”
What can the money be used for?
Homeowners consider equity release mortgages for many practical reasons.
These may include:
- Repaying an existing mortgage
- Clearing an interest-only balance
- Funding essential home repairs
- Adapting a home for reduced mobility
- Supporting retirement income
- Helping children or grandchildren
- Replacing unsuitable borrowing
- Paying for private care or support
- Creating an emergency reserve
- Funding a major one-off expense
The purpose affects the advice.
Borrowing for necessary roof repairs creates a different decision from borrowing for discretionary spending. Likewise, releasing money to gift to family creates different estate and affordability considerations.
For wider planning considerations, visit our guide to planning for retirement.
What costs may apply?
An equity release mortgage may involve several costs.
These can include:
- An adviser fee
- A provider arrangement fee
- A property valuation fee
- Solicitor’s fees
- Completion or transfer fees
- Interest
- Possible early repayment charges
- Costs for additional legal or specialist work
Some fees may be added to the mortgage. However, adding a fee means interest may also be charged on that amount.
Applicants should receive a personalised illustration showing:
- The initial loan
- The interest rate
- How the balance could grow
- Fees
- Repayment conditions
- Early repayment charges
- The potential effect on remaining property equity
What happens to the mortgage when the homeowner dies?
For a single borrower, the mortgage normally becomes repayable after death.
For joint borrowers, it is usually repaid after the last surviving borrower dies or moves permanently into long-term care.
The estate is normally given a period to sell the property and repay:
- The original loan
- Accumulated interest
- Any unpaid fees
- Other amounts due under the contract
The remaining sale proceeds belong to the estate.
Where an eligible plan includes a no-negative-equity guarantee, the estate should not have to repay more than the property’s sale proceeds, provided the applicable conditions are followed.
The Equity Release Council’s standards and safeguards explain the protections expected from Council members and qualifying products.
Can you move home with an equity release mortgage?
Many qualifying lifetime mortgages are portable.
This may allow the mortgage to move to another acceptable property. However, the new home must meet the provider’s lending criteria at that time.
Problems may arise where the new property has:
- A lower value
- Unusual construction
- A short lease
- Age restrictions
- Commercial use
- Significant repair issues
- A location outside the provider’s criteria
A partial repayment may be required when moving to a less valuable property.
Therefore, someone who expects to downsize should consider that possibility before taking the original mortgage.
What are the main risks?
Interest can grow substantially
Where interest is unpaid, compounding can increase the mortgage balance over time.
The estate may receive less
The loan and interest are repaid from the property. This normally reduces the value remaining for beneficiaries.
Benefits may be affected
Holding released money as savings could affect entitlement to some means-tested benefits.
Benefit rules depend on the claimant’s circumstances. They should be checked before funds are released or retained.
Moving may become more difficult
Although many plans can be transferred, the replacement property must normally meet provider criteria.
Further borrowing may be restricted
Releasing a high proportion of the property’s value can reduce future borrowing capacity.
Early repayment can be expensive
Some products charge an early repayment fee if the mortgage is repaid before the normal repayment event.
Property responsibilities continue
The homeowner normally remains responsible for insurance, maintenance and keeping the property in acceptable condition.
The FCA has said consumers should understand both the immediate and long-term effects of equity release. Its review of the equity release sales and advice process highlights the importance of clear and suitable advice.
What alternatives should be considered?
Equity release should not be assessed in isolation.
Possible alternatives include:
- Downsizing
- Using savings
- Using pension income
- A standard residential remortgage
- A retirement interest-only mortgage
- A later-life repayment mortgage
- A second charge mortgage
- Family support
- Local authority support
- Delaying the expense
- Releasing a smaller amount
Some homeowners can meet monthly payments and may qualify for another form of later-life borrowing. Others may prefer to move to a smaller home rather than increase secured debt.
Our later-life lending guide explains several mortgage options that may be considered after 55.
Homeowners who remain eligible for mainstream borrowing can also read the Connect Mortgages guide to equity release mortgages and alternatives.
How Connect Lifetime can help
An equity release mortgage should fit the homeowner’s wider circumstances, not only their property value.
Connect Lifetime advisers can help assess:
- Why money is required
- How much is reasonably needed
- Existing mortgages and debts
- Income and expenditure
- Health and future care considerations
- Family and inheritance priorities
- Benefit implications
- Alternative mortgage options
- Product features
- Interest and repayment choices
- Drawdown requirements
- Moving plans
- Early repayment conditions
The process should establish whether equity release is suitable before comparing products.
Where another mortgage route is more appropriate, the wider Connect Lifetime service includes residential mortgages, remortgages, later-life lending and related protection discussions.
Questions to ask an equity release adviser
Before proceeding, consider asking:
- Why is this product suitable for my circumstances?
- Which alternatives have been considered?
- How much could the balance become after 10, 15 or 20 years?
- Can I make interest or capital repayments?
- What early repayment charges apply?
- Can I move the mortgage to another home?
- Could my benefits be affected?
- What happens if I need long-term care?
- How much property equity might remain?
- What fees will I pay?
- Is a drawdown arrangement more suitable?
- How could the decision affect my family?
A recommendation should answer these questions in clear language.
Speak to an equity release mortgage adviser
The value held in a home may support later-life plans. However, using that value today changes what remains available tomorrow.
The purpose of advice is to measure both sides of that decision.
A Connect Lifetime adviser can review your requirements, explain the risks, consider alternatives and assess whether an equity release mortgage may be suitable.
Speak to a Connect Lifetime adviser to discuss your circumstances.
Frequently asked questions
Do I still own my home with an equity release mortgage?
Yes, where the product is a lifetime mortgage. You remain the legal owner, subject to the mortgage secured against the property.
Is equity release money tax-free?
The amount released is normally not treated as taxable income. However, using, investing or gifting it may create tax, benefit or estate-planning consequences.
Do I need to make monthly repayments?
Not always. Many lifetime mortgages allow interest to be added to the loan. Other plans allow voluntary repayments, while some require payments for a specified period.
Can I repay an equity release mortgage early?
Usually, but an early repayment charge may apply. The amount and calculation method depend on the product.
Can equity release affect Pension Credit?
Released money retained as capital may affect means-tested benefits. A benefit check should be completed before proceeding.
Does equity release reduce inheritance?
It normally reduces the property equity remaining in the estate because the mortgage and interest must be repaid.
Can I use equity release to repay my current mortgage?
Potentially. Any mortgage secured against the property will normally need to be repaid when the equity release plan completes.
Is an equity release mortgage available under age 55?
Mainstream lifetime mortgages are generally designed for homeowners aged 55 or over. Other mortgage or secured borrowing options may be available to younger homeowners.
Important information: Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits. A lifetime mortgage is secured against your home. Terms and conditions apply.
