Equity Release and Rising Living Costs: Rising household costs can change the value of money without changing the number printed on a bank statement.
In January 2022, many retired homeowners were seeing food, energy and household bills rise faster than their regular income. The Office for National Statistics reported that UK Consumer Prices Index inflation reached 5.4% in December 2021.
For homeowners with substantial property wealth but limited accessible savings, this created an important question. Could equity release provide financial room without requiring the home to be sold?
The answer depended on more than the immediate need for money. It also depended on the product, interest, estate impact, benefits position and available alternatives.
At a Glance
- Rising living costs placed pressure on some retirement budgets in early 2022.
- Equity release could allow eligible homeowners to access part of their property wealth.
- Most equity release plans were lifetime mortgages secured against the home.
- Interest could compound when no repayments were made.
- A drawdown plan could reduce unnecessary interest compared with taking one large sum.
- Released funds could affect inheritance and entitlement to means-tested benefits.
- Equity release required regulated advice and a review of suitable alternatives.
Why Living Costs Became a Later-Life Lending Issue
The Office for National Statistics inflation figures showed that CPI inflation reached 5.4% in December 2021.
Higher prices do not affect every household equally. People relying mainly on pensions or fixed retirement income may have less scope to increase their earnings.
Some homeowners therefore began reviewing whether the value held in their property could support:
- essential home repairs;
- repayment of an existing mortgage;
- higher household bills;
- adaptations for health or mobility;
- an emergency cash reserve;
- planned retirement spending.
Equity release could provide access to money, but it did not reduce the underlying price of goods or services. It converted part of the home’s value into accessible funds while creating a long-term financial commitment.
How Equity Release Worked in 2022
Equity release was generally available to eligible homeowners aged 55 or over.
The two principal forms were lifetime mortgages and home reversion plans. However, lifetime mortgages accounted for most equity release activity.
A lifetime mortgage is a loan secured against the borrower’s home. The homeowner retains ownership of the property.
The loan is normally repaid when the final borrower:
- dies;
- moves permanently into long-term care; or
- sells the property without transferring the plan.
Monthly repayments are not usually compulsory. However, interest is charged and may be added to the outstanding balance.
For a broader explanation, read how equity release works.
Lump Sum or Drawdown?
The amount and timing of the borrowing could materially affect its long-term cost.
Lump-sum lifetime mortgage
A lump-sum plan releases the agreed amount when the mortgage completes.
This may suit a defined expense, such as repaying an existing mortgage or completing essential repairs. However, interest normally begins on the whole amount immediately.
Drawdown lifetime mortgage
A drawdown plan provides an initial amount and places the remaining facility in a reserve.
The homeowner can request further funds later, subject to the lender’s terms and availability. Interest is normally charged only on money already withdrawn.
This could be relevant where the homeowner needed occasional support rather than one large payment. Taking less money at the outset could reduce the amount on which interest accrued.
Why Compound Interest Mattered
A lifetime mortgage could ease current pressure while increasing the amount owed later.
Where interest was not paid, it was added to the loan. Future interest was then charged on both the original borrowing and the interest already added.
For example, borrowing £40,000 did not mean that £40,000 would eventually be repaid. The balance could grow considerably over a long period.
The final cost depended on:
- the interest rate;
- the amount released;
- the length of the plan;
- whether further money was withdrawn;
- whether voluntary payments were permitted and made.
The Equity Release Council’s explanation of lifetime mortgages provides further information about rolled-up interest and product structures.
Could Equity Release Be Used for Regular Bills?
Released money was not restricted to one prescribed use. A homeowner could use it to support household spending.
However, using secured borrowing to meet recurring bills required particular care.
A one-off shortfall is different from an ongoing gap between income and expenditure. If the household budget remained in deficit, released money could eventually run out while the mortgage balance continued to grow.
An adviser therefore needed to establish:
- how much additional income was required;
- whether the need was temporary or continuing;
- how long the released money might last;
- whether benefits or grants were available;
- whether expenditure could be reduced;
- whether another mortgage or retirement product was suitable.
This distinction was important. Equity release could provide capital, but it was not pension income.
Benefits, Tax and the Estate
Money released from a main residence was generally received without income tax because it was borrowing rather than earnings.
However, holding released money as savings could affect eligibility for means-tested benefits. This required an individual assessment rather than a general assumption.
Equity release could also reduce the value remaining in the estate. The mortgage and accumulated interest would normally be repaid from the sale proceeds before the remaining value passed to beneficiaries.
Anyone considering equity release should discuss inheritance expectations, future care needs and family plans during the advice process.
The amount available was also not equal to the homeowner’s total equity. Age, property value, health, existing borrowing and lender criteria could all affect how much equity could be released.
What Alternatives Needed to Be Considered?
Equity release should not have been assessed as the only route.
Depending on the homeowner’s circumstances, alternatives could include:
- using accessible savings;
- claiming available benefits;
- reducing non-essential expenditure;
- downsizing;
- taking in a lodger, where appropriate;
- receiving family support;
- using a standard mortgage;
- considering a retirement interest-only mortgage;
- arranging a smaller release;
- delaying non-essential spending.
Some homeowners may have benefited from comparing downsizing, remortgaging and equity release before making a decision.
For advisers, the wider equity release advice framework also required the client’s needs, alternatives, risks and long-term plans to be clearly examined.
Equity Release Was a Decision About Time
The cost-of-living pressure felt immediate. Equity release operated over many years.
That difference in time was central to the decision.
Money released in 2022 could solve a current financial need. Yet interest, reduced inheritance and future housing choices could remain relevant long after the original pressure had passed.
The right question was therefore not simply whether money could be released. It was whether releasing it represented a suitable use of the home’s value when measured against the homeowner’s wider plans.
Speak to an Equity Release Adviser
Connect Lifetime Mortgages can help eligible homeowners review equity release, lifetime mortgages and other later-life lending options.
An adviser will consider your income, expenditure, property, existing borrowing, future plans and possible alternatives before making a recommendation.
Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits. It may not be suitable for everyone.
Frequently Asked Questions
Could equity release help with rising living costs?
It could provide eligible homeowners with access to money held in their property. However, it created secured borrowing and could increase in cost over time.
Was equity release only for large one-off expenses?
No. Released funds could be used for several purposes. However, using borrowing for regular household bills required careful budgeting and advice.
Would I have needed to make monthly repayments?
Many lifetime mortgages did not require monthly repayments. Interest could instead be added to the loan. Some products allowed voluntary payments within the lender’s rules.
Could taking a smaller amount reduce the cost?
Potentially. Interest was normally charged on the amount withdrawn. A smaller initial release or drawdown structure could therefore limit unnecessary interest.
Could equity release affect my benefits?
Yes. Released funds held as savings could affect means-tested benefits. An adviser should review this before an application proceeds.
Would equity release reduce inheritance?
Usually. The mortgage and accumulated interest would normally be repaid from the property sale, leaving less value for the estate.
Was advice required?
Equity release was a regulated product requiring specialist advice. The recommendation needed to reflect the homeowner’s circumstances, needs and suitable alternatives.
