Use this guide to:

• learn what equity release means and how it can help you;
• how taking equity out of your house works; 
• understand the main pros and cons of different types of equity release schemes;
• find out about alternative options to equity release; and
• find out where to go for further advice before agreeing to an equity release scheme.

What is equity release and how does it work?

If you live in mortgaged property, the equity in it is the difference between the value of your home and the total of the mortgage and any loans that you have secured on it. If your home is worth more than your mortgage and secured lending, there will be equity.

Equity release lets homeowners (usually age 55 and over) access some of the equity tied up in their home via a lifetime mortgage or home reversion plan, without having to leave their home. See the next section, Different equity release schemes.

Get professional advice before entering into an equity release scheme. It is very important that you fully understand the terms and conditions before entering into any new agreement. Later in this guide, we explain where you can get professional advice.

Different equity release schemes

There are two main types of equity release schemes. 

• Lifetime mortgages 
• Home reversion 

Lifetime mortgages and home reversion schemes work differently. Which is suitable for you will depend on your circumstances and what you want to achieve. 

Lifetime mortgages 

A lifetime mortgage can give you funds in a single lump sum or in smaller amounts over time. You will agree the maximum amount of money that you can borrow with the scheme provider. If you take out a lifetime mortgage, you will still own your home. The lifetime mortgage will carry interest. You can choose to either make repayments or let the interest build up. The loan and any interest will be paid back either when you die or move into long-term care. 

Home reversion 

Under this scheme, you can sell all or part of your home to a home reversion company. They then give you a lump sum of money or regular monthly payments. You can continue living in the property until you die. You do not have to pay any rent. 

How equity release can help

Equity release can be helpful if you want to repay an existing mortgage, increase your income or pay for care needs.

You may also choose to use equity release to help you pay debts that you owe. Equity release can help you in different ways, but always contact us for advice before choosing this option. We can help you to understand the pros and cons before you decide what to do.

• It can ease pressure on you if your creditors are chasing you for payment.
• It may help to stop creditors taking legal action against you.
• If you can’t pay off all your debts, you could reduce them so that you can manage payments more easily, or ask your lenders to write off the rest.
• It can help you to get out of debt if you have a low income or no money available.

How much equity release can I get?

The amount of equity you can release from your home will depend on several factors, such as your age, your health, how much your property is worth and whether you are applying for a lifetime mortgage or home reversion plan. Each lender decides the limits for their own equity release schemes, so the amount you can release can also vary from lender to lender.  

However, as a general idea:  

• under a lifetime mortgage plan, you can usually release from 20% to 60% of the value of your home; and 
• under a home reversion plan, you can typically sell from 25% to 100% of your home. 

Get independent financial advice before you agree to equity release. This will help you to compare how much equity different lenders will let you release, and which products are better suited to your situation. See Get further advice before agreeing to equity release later in this guide. 

How can I use the money I get from equity release?

You may have a lot of different creditors asking you for money. Some may put more pressure on you than others. However, this doesn’t always mean that you should pay those creditors first. Before you decide what to do with your equity release loan funds, it is important to understand the powers that different creditors have.

Priority creditors have the most power. If you do not pay what you owe, you may lose an essential service or an essential item. For example, if you do not pay your mortgage, you could lose your home. If you do not pay your gas or electricity, your supply could be cut off. If you do not pay your council tax, councils in England could apply to send you to prison as a last resort.

Non-priority creditors cannot immediately take away an essential service or an essential item if you do not pay them. These creditors are more limited in what they can do to collect what you owe. Credit cards, unsecured loans, store cards and unsecured overdrafts are examples of non-priority debts.

Check you have enough to cover your living costs  

Always check that you have enough money to cover your ongoing essential living costs before you decide how to use the money from your home equity release. Use My Money Steps, our free online budget tool, to work out your budget.  

If your budget shows that you do not have enough money coming in each month to pay your essential living costs, you may need to put some of the money aside to help pay these costs in the future. Contact us for advice before you make any offers to pay your debts. 

How to use equity release money to pay priority vs non-priority debts  

If you have enough money available to pay your ongoing living costs, you may decide to use the money from your home equity release to pay towards your debts. 

Deal with your priority debts first 

As priority creditors have strong powers to get their money back, they will usually expect you to pay these debts in full. Add up all the amounts you owe to your priority debts to check that you have enough funds available to clear all these debts. If you do not have enough funds to pay all the priority debts you owe, contact us for advice. 

Dealing with non-priority creditors 

What you do next, will depend upon how much money you have available from your equity release loan fund, and how much you want to use to pay towards your non-priority debts.  

We usually recommend that you treat your non-priority creditors fairly. 

• If you want to pay your non-priority debts in full, add up all the amounts you owe to these creditors to check that you have enough funds available to clear all your non-priority debts.
• If you have a lump sum of money and want to use it to reduce your non-priority debts, we suggest dividing your money between your creditors on a pro-rata basis. This means that your biggest debt gets the largest share of the money. All of your creditors will be treated fairly and get paid the same amount of pennies for every pound you owe them. See How to work out pro-rata offers later in this guide.
• You could make full and final settlement offers to all of your non-priority creditors. This means offering each creditor a fair share of your available money and asking them to write off the rest of the debt. There are important things to consider when making full and final settlement offers. For more information, see our Full and final settlement offers guide.
• You could consider an individual voluntary arrangement (IVA). This is a legally binding agreement with your creditors to pay part of your debts back. You can also include certain priority debts, such as council tax arrears in this type of arrangement. IVAs are often based on making regular payments over an agreed period. However, you may also set up an IVA based on selling or using your assets to raise a lump sum. Creditors vote on whether to agree to the arrangement. There are rules about how many creditors have to agree in order for the arrangement to be set up. There are also fees to pay to the person who sets up the arrangement for you. It is important to understand the pros and cons of an IVA before choosing this option. For more information, see our Individual voluntary arrangements guide.    

Do you have certain non-priority debts that you want to pay first? 

• There may be some limited circumstances where you choose to clear certain non-priority debts before others. For example, some non-priority creditors may threaten to take legal action against you to recover what they say you owe. Just because creditors threaten this, doesn’t mean it will happen. Some creditors threaten to take further action but don’t carry it out. However, some aggressive creditors could take court action against you quickly. If legal action will have serious consequences for you, you could reduce or clear these debts first. If you are considering doing this, contact us for advice.
• Some creditors may be charging interest at a much higher rate than others. This may mean that those debts are increasing much more quickly. In this situation, you could choose to use your money to reduce or clear these debts first. This may help you to manage your remaining debts.

How does equity release affect benefits?

If you use the money you raise from equity release to clear debts, it can affect your benefit entitlement.

• If you already claim benefits, you must tell the Department for Work and Pensions (DWP) or council about the money you receive from equity release. This can affect how much you are entitled to. Be careful, because you may still be treated as having the money, even after using it to clear debts. Contact us for advice if you are concerned about your benefits being affected.
• If you claim benefits after using your money to clear debts, you may still be treated as having the money for the purpose of working out how much benefit you are entitled to. This is a complicated area. Contact us for advice.

How does equity release affect tax?

You will not usually need to pay tax on the equity released from your main home. However, in some situations, you may need to check how releasing equity affects your tax position. We can suggest ways of finding the right type of professional tax advice. Contact us for advice.

Rules about equity release

Lifetime mortgages and home reversion schemes are regulated by the Financial Conduct Authority (FCA).  This means that firms which offer either type of scheme must follow the FCA’s rules about equity release. The FCA’s rules say that equity release firms must take reasonable steps to make sure that any equity release products they recommend to you are suitable for you. Also, when the firm considers whether equity release is suitable for you, they should take into account how it will affect any benefits you receive and your tax position.

Equity Release Council

The Equity Release Council (ERC) is a not-for-profit organisation that represents different types of firms involved in equity release. This includes lenders, qualified financial advisers, solicitors and other industry professionals. They aim to provide you with information and protection if you are considering entering into an equity release scheme. They provide guidance to their members about how entering into an equity release scheme should work.

Firms which advise on and provide equity release schemes and who are ERC members should all follow the FCA’s rules about equity release. They should also follow further rules and guidelines that the ERC has set out. By using a firm that is an ERC member, you will have further safeguards to help make sure that equity release is a realistic option for you.

You can search for an ERC member using the Find a Member directory on the ERC’s website.

Equity Release Council product standards

The ERC has certain standards that they recommend equity release products should meet. ERC members should only say that a product they are offering meets these standards if it meets all of them. Check whether any equity release product that you are considering meets all of the ERC’s standards.

• For lifetime mortgages, interest rates must be either fixed or, if they are variable, there must be a maximum interest rate for as long as the scheme lasts.
• You must have the right to stay in your home for the rest of your life or until you move into long-term care. This applies only if your property remains you main home and you keep to the terms of the contract.
• You are allowed to move to another property as long as your equity release firm agrees that the new property is suitable as security for your equity release loan.
• When your property is sold, neither you nor your estate will have to pay anything else if the money raised is not enough to clear the loan to your equity release provider. 
• ERC members must make sure that you have received independent legal advice before you enter into an equity release scheme. Check that any solicitor you get advice from is an ERC member. Members are committed to the ERC’s standards and principles.
• If you take out a new plan with an ERC member, they must not charge you a penalty for making a loan repayment that is allowed under the terms of the agreement. Making partial repayments can save on interest costs. You may need independent financial advice if you are thinking about making repayments on your loan. You can find an independent financial adviser on the MoneyHelper website.

Before you enter into an equity release plan, you should be given a clear and accurate explanation of what your equity release plan involves. The advantages and limitations of your plan should be clearly explained, together with the terms and conditions. You should be given information about:

• all the costs involved in setting up the plan;
• what will happen if you want to move to another property;
• how the plan affects your tax; and
• how changing house prices may affect you.

When you get independent legal advice, check that you understand:

• what the scheme involves;
• the costs to you; and
• the disadvantages involved, as well as the advantages.

The ERC’s rules and guidance give more information about how ERC members should operate. See the ERC’s website www.equityreleasecouncil.com.

Fees charged

Different fees are likely to be charged when you enter into an equity release agreement.  

• A fee to have your property surveyed. You usually have to pay this when you apply. The amount of this fee depends on the estimated value of your home.
• Application fee. You need to pay this when your equity release transaction goes through. You may be able to pay for it by borrowing a bit extra under your equity release plan.
• Legal fee. You need to pay this to your solicitor for the work they do for you in dealing with the legal side of the scheme. 
• Advice fee. Your financial adviser may charge you a fee for the advice they give to you. Some advisers may not charge you for the advice they give. Instead, they may get some commission from the lender that you take out an equity release plan with.

Check what fees you will be charged before agreeing to anything related to an equity release scheme.

Pros of equity release

• It can give you a cash lump sum or regular monthly payments. This can help with regular bills, home improvements, care costs and so on.
• You can usually stay in your property for as long as you need to.
• You may be able to move, as long as the new property is acceptable to the equity release firm.
• You can set aside part of your property value as an inheritance for your family members.
• You do not have to pay rent to the equity release provider.
• For lifetime mortgages, you may be able to choose whether to pay back interest or let it build up.
• The loan is only paid back when you die or when your property is sold.
• For some lifetime mortgages, interest rates are either fixed or can’t rise above a set level.
• For some equity release schemes, there is a guarantee that the total amount you owe cannot be greater than the value of your property.
• You will not have to pay tax on the equity released from your main home.

Cons of equity release

• Your equity immediately becomes less.
• You may only be able to leave a smaller inheritance to other people when you die.
• A lifetime mortgage means that you are securing further borrowing against your home.
• For home reversion schemes, home reversion companies will usually pay a lot less than the full market value of their share of your property. Also, you will no longer be the sole owner.
• If you die or sell your home shortly after taking out an equity release scheme, you could lose money. There may also be early repayment charges if you decide to repay what you owe within a short time after taking out the deal.
• If house prices fall, you may owe a greater percentage of your home’s value.
• With a lifetime mortgage, if you live long enough, you could end up owing 100% of your property’s value.
• The money you get from equity release could affect the amount of benefits you are entitled to.
• You may need the provider’s permission for someone else to move in, such as a relative or carer.
• You usually need to get your provider’s permission to move to another property.
• You usually have to pay costs for arranging the transaction, for your property to be valued and for legal fees.
• You will still be responsible for paying all the usual bills, such as council tax, gas and electricity. You may also need to pay for buildings insurance.
• You will usually be responsible for repairs and maintenance. So you may need to regularly set aside some money for this.

Get further advice before agreeing to equity release

Independent financial advice

It is very important that you get impartial financial advice about the pros and cons of an equity release scheme. Before agreeing to use an independent financial adviser, check what their fees will be and when these need to be paid.

Search the ERC’s website to check that the financial adviser you are using is a member of the Equity Release Council. See Useful contacts.

You can also contact The Society of Later Life Advisers. They are a not-for-profit organisation. Their members are financial advisers who are trained to give financial advice about matters that affect you in later life. See Useful contacts.

Complaints

If you have a complaint about a financial adviser or an equity release provider, ask for a copy of their complaints procedure. If you have followed their complaints procedure and are unhappy with their response, or if your complaint has not been resolved after eight weeks, contact the Financial Ombudsman Service. See Useful contacts.

Independent legal advice

You can search for legal advice by using the Law Society’s website. See Useful contacts.

Also check that your legal adviser is a member of the Equity Release Council. See Useful contacts.

Before agreeing to use a solicitor, check what their fees will be and when these need to be paid.

Complaints

If you have a complaint about a solicitor, ask for a copy of their complaints procedure. If you have followed their complaints procedure and are unhappy with their response, contact the Legal Ombudsman. See Useful contacts.

Alternative options

You may wish to consider alternative ways of raising funds, rather than choosing an equity release scheme.

Unsecured borrowing

If you only want to borrow a small amount and you can meet the repayments out of your usual income, an unsecured loan may be cheaper than an equity release scheme.

Shop around to see what types of products are available.

Search for an independent financial adviser by using the FCA register. See Useful contacts. Some advisers will offer a free first interview. Some may not charge you a fee, but instead charge the lender a fee if you take out a particular loan with that lender.

Extend your mortgage

If you haven’t yet paid off your current mortgage, your lender may agree to extend your mortgage and release you some more money. Whether your lender will do this depends on their policy, your age and circumstances.

Always seek independent financial advice. Search the FCA register to find a suitable adviser. See Useful contacts.

Move to a cheaper property

You may wish to consider selling your house and moving to a cheaper property. This would enable you to release money from your home and still be the owner of your new property. However, you would have to pay for legal fees for a solicitor, estate agent’s fees, removal costs and possibly stamp duty.

Benefits and grants

You may be on a low income and need money for home improvements or to adapt your home to make it suitable for a disability. You may be able to get a grant from your local authority. Contact us for advice.

How to work out pro-rata amounts

If you have a lump sum amount that you need to divide up amongst your non-priority creditors, the usual way of doing this is to work out ‘pro-rata’ amounts. This section explains how to work out pro-rata amounts and includes an example calculation.  However, if you prefer, we can work out the pro-rata amounts for you.  

Pro-rata calculation 

• Step 1 – make a list of all your non-priority creditors and how much you owe each of them. 
• Step 2 – add up the total amount that you owe to all your non-priority creditors. 

You will then need to follow steps 3 and 4 for each non-priority debt. 

• Step 3 – multiply the lump sum amount you have available to pay your non-priority creditors by the amount of debt that you owe an individual creditor. 
• Step 4 – then divide the figure worked out in ‘step 3’ by the total amount that you owe to all your non-priority creditors. 

Example 

You have a lump sum of £12,000 available to pay towards your non-priority debts. 

First step: You list each of your non-priority debts. 

• £6,900 to a credit card lender 
• £3,600 to a catalogue company
• £13,500 to a loan company 
• £6,000 to the bank 

Second step: You add up how much you owe in total to all your non-priority creditors. The total is £30,000. 

To work out the pro-rata amount for each creditor, the third and fourth steps can be done together. For each non-priority creditor, multiply the lump sum available (which is £12,000) by the amount you owe to that creditor, and then divide by the total amount you owe to all your non-priority creditors (which is £30,000). 

• Credit card lender – £12,000 x £6,900 ÷ £30,000 = a pro-rata amount of £2,760 
• Catalogue company – £12,000 x £3,600 ÷ £30,000 = a pro-rata amount of £1,440 
• Loan Company – £12,000 x £13,500 ÷ £30,000 = a pro-rata amount of £5,400
• Bank – £12,000 x £6,000 ÷ £30,000 = a pro-rata amount of £2,400 

FAQs

Can I release equity to clear debt?

You need to be a homeowner and usually at least age 55 to release equity from your home. If you are able to get equity out of your home, you can use the money, or some of it, to pay towards your debts. Whether you can clear your debts in full will depend upon how much money you can release.  

Before you use any funds to clear your debts, first check that you can afford your ongoing essential living costs. Also get free debt advice so you can consider all of the debt solutions available to you.  

Is equity release suitable if I receive benefits?

This will depend on your personal circumstances. 

Each type of benefit has its own rules about who is entitled to that particular benefit and how much benefit they can get. Not all benefits are affected by equity release. However, means-tested benefits, such as Universal Credit and Pensions Credit, have rules about how much income you can have coming into your home, and the amount of savings you can have. If you release equity from your home, the money you get could be treated as savings for means-tested benefits. If this takes you over the savings limit for a particular means-tested benefit, it could reduce the amount of benefit you get or stop your entitlement altogether. Some energy grants and council tax reduction schemes can also be affected by equity release funds. 

If your equity release company pays some of the funds directly to your mortgage lender to clear the mortgage on your home, that amount is not usually treated as savings for benefit purposes.

Under FCA rules, your equity release provider should include any impact to benefit entitlement when assessing whether an equity release product is appropriate for you. Always ask them to explain the impact of equity release on your current and future benefit entitlement so you can decide if it’s right for you.   

What are the differences between lifetime mortgages and home reversion?

They are both types of equity release schemes that allow you to continue living in your home, usually until you die or permanently move into residential care. Both schemes may allow you to take equity release funds as a single lump sum, or in smaller amounts over a period of time. 

Under a lifetime mortgage, you take out a secured loan against your home. You still own your home and are charged interest on the loan. You can agree to make regular repayments towards the loan interest or allow the interest to be added to the amount of the loan secured on your home (this will increase the amount secured against the property).  

Under a home reversion, you sell part, or all, of your home to the equity release provider. The provider will usually offer you less than the market value for the share of your home you sell. A home reversion arrangement is not a loan, so will not be secured against your home. You will no longer own the portion of your home that you sell under a home reversion scheme.   

Is equity release a good idea? 

Whether equity release is a good option for you, will depend on your particular circumstances and what you want to use equity release for. You will need to take time to consider both the pros and cons of using equity release and weigh up whether you think it’s right for you. You should also consider whether there are any alternative solutions that could provide you with a better outcome.  

For a list of the main pros and cons to consider, take a look at the Pros of equity release and Cons of equity release sections in this guide.   

For alternative ways of raising funds, take a look at the Alternative options section in this guide. 

If you plan to use equity release to deal with your debts, make sure you get free debt advice first so you can consider all debt solutions available to you.  

Do you pay interest on equity release? 

Whether you pay interest on equity release funds, will depend on the type of equity release scheme you use. There are two main types of schemes.  

• A lifetime mortgage scheme 
• A home reversion scheme 

Under a lifetime mortgage scheme, you take out a secured loan against your home. The equity release provider will charge you interest on the loan. You can agree to make regular repayments towards the loan interest or pay nothing and allow the interest to be added to the loan secured on your home.  

If the interest is added to your loan, the amount of the loan secured on your home will increase every year as new amounts of interest are added. Compound (roll-up) interest will apply. This means that you will pay interest on the original loan amount and on interest that has already been added to your loan. This is sometimes called paying interest on interest.  

Under a home reversion scheme, you sell part, or all, of your property to an equity release provider. A home reversion arrangement is not a loan, so you do not pay interest to the equity release provider on the portion of your home you have sold to them. 

Do you pay tax on equity release? 

You do not usually have to pay income tax or capital gains tax on the money you receive from equity release on your main home.  

Under FCA rules, your equity release provider should include any impact to your tax position when assessing whether an equity release product is appropriate for you. Ask them to explain any impact to you.  

If needed, we can also suggest ways of finding the right type of professional tax advice. 

Do you need a solicitor for equity release? 

Yes. You need to appoint your own solicitor to make sure you get independent legal advice about the equity release product you are considering. This is important so that you understand any risks and obligations that the agreement may contain before you go ahead with it. Your solicitor will also carry out the conveyancing work needed for the equity release arrangement. A solicitor will charge you fees for their services. Ask for information about their fees before you appoint them. Also check whether the fees are fixed or could change during the process.     

Your equity release provider will also have its own solicitor. 

Useful contacts

Equity Release Council Not-for-profit industry body for different types of firms involved in equity release. Phone: 0300 012 0239 www.equityreleasecouncil.com

Financial Conduct Authority (FCA) register The Financial Services Register is a public record that shows details of firms, individuals and other bodies that are, or have been, regulated by the FCA. register.fca.org.uk

Financial Ombudsman Service Helps to resolve individual complaints between financial businesses and their customers. Phone: 0800 023 4567 www.financial-ombudsman.org.uk

Law Society The independent professional body for solicitors. You can visit their website and search for a solicitor near to you. www.lawsociety.org.uk 

Legal Ombudsman Helps to resolves complaints about the service you have received from your solicitor. Phone: 0300 555 0333 www.legalombudsman.org.uk

Society of Later Life Advisers Membership organisation for financial advisers who are trained to provide advice on later life issues. Phone: 0333 2020 454 www.societyoflaterlifeadvisers.co.uk

Other guides that may help you

Full and final settlement offers guide

Individual voluntary arrangements guide

Ways to clear your debt guide