What is equity release
Finance

What is equity release? How it could work for you

8 min read |
Alistair Clay Author

Author 26.04.2023

Alistair Clay

If you're a homeowner over a certain age, you may be wondering what is equity release?

Equity release allows you to use your property as a source of cash, which may be useful when it comes to paying later life costs.

It could allow you to access and pay for the care you want in your later years, but it's a financial move that needs careful consideration.

This article will cover the big question of what is equity release and help you decide if it's a viable option for you.

Disclosure: You should not use this article to make financial decisions and we highly recommend you seek professional advice from someone who is authorised to provide financial advice.

Here’s a summary of what we’ll cover:

  • Equity release is when you take out a loan against the value of your home while still living in it. 
  • It is an option for people wanting to access money to pay for care fees, including care at home, but does come with some risks. 
  • There are two main types of equity release schemes, a lifetime mortgage and home reversion.  
  • They carry different conditions regarding interest and repayment so one might be more suitable for your situation.
Equity release to pay for home care

What is equity release?

Equity release is when you access the equity tied up in your home as ready to use cash without having to sell it. 

It can be used to pay for home care costs, debts, inheritance tax or to create a steady income.

Unlike selling your home and using the money to downsize or move to a care home, equity release means that:

  • You can continue living in your home until you move into a care home or pass away. 
  • The loan is repaid using the value of the property sale and can be protected by a special equity release guarantee. 
  • Equity can be converted to cash which could pay for home care costs that you need to live independently at home for longer.
  • Extra cash may help you fund more or better quality home care or help you afford a high standard care home.

Confused about care funding?

Free Care Funding Guide Download

Who can use an equity release scheme?

Equity release schemes are generally available to homeowners over a certain age, usually around 55.

There is a minimum age for taking out an equity release product as older people represent a lower risk to the lender. 

To be eligible to use an equity release product, your home must be valued at least £70,000, and it must be your primary residence. 

There may also be a minimum amount you can borrow as a one off sum, so check the conditions carefully for each provider and product.

Does next of kin have to pay care home fees

What equity release products are available?

You can release equity into usable cash through two main financial products:

  • a lifetime mortgage
  • or a home reversion scheme

Effectively, you take out a loan through a financial provider that allows you to release between 20% and 60% of your property’s value

However, the two products have different conditions to satisfy that affect your property in different ways. 

It’s advisable that you consider carefully how each product might affect your financial status or property long term.

Who can use an equity release scheme

Lifetime mortgage

A lifetime mortgage is when you take out a mortgage secured on your property while retaining ownership. 

The money you are able to loan is based on the value of your property, but you will also pay interest on this.  

There are two types of lifetime mortgages which we will outline in this section.

Interest roll up mortgage

An interest roll up means that you don’t have to make any regular payments to the mortgage. 

Instead, you get a lump sum or are paid a regular amount and get charged interest which is added to the original loan. 

When your home is sold, the amount you borrowed, including the years of rolled-up is repaid with money from the sale.

Interest-paying mortgage

With an interest paying mortgage you get a lump sum and make payments regularly. 

This reduces the impact of interest roll-up and some plans also allow you to pay off some of the total amount if you wish to. 

The amount you borrowed is repaid when your home is sold, with the interest already paid.  

Key points for lifetime mortgage equity release

Paying interest: Lifetime mortgages allow you to take out a loan which you must pay interest on either over time or as a lump sum.  This can make it an expensive option as it is subject to interest rates which can change. 

Live at home: You can still live at home with a lifetime mortgage and be in charge of upkeep.

Primary residence: The property you want to release equity from must be where you live.

equity release home reversion

Home reversion

Home reversion is an equity release option for people over 65 who know they are likely to remain at home and receive care. 

This type of equity release allows you to release money by selling all or part of your property to a home reversion provider. 

You can choose to sell a large portion or smaller portions over time, as and when you need the money. 

In exchange, you receive a tax free lump sum or can choose to get paid in instalments as regular income.

Need to know what care costs you might face?

The cost of elderly care

Where can you live if you opt for a home reversion plan?

You may continue living in your property as a tenant, as ownership will transfer to the home reversion company. 

You will not have to pay monthly rent, though you will have to agree to maintain and insure it, plus pay council tax. 

They are more suitable to people who plan to receive care at home as you can only receive 20%- 60% of the market value of your property. 

So if you plan to move to a care home and may rely on money from selling a property, this would not be the best option.

equity release to pay care costs

What are the pros and cons of equity release through home reversion?

Pros

  • A percentage of your property can be saved for inheritance by only selling part of it to the lender.
  • You will always own the same percentage of your property regardless of the change in market values, unless you sell more. 
  • It’s a source of reliable access to funds for paying home care costs.

Cons

  • You will receive considerably less for your property than if you sold it normally.
  • Your property is no longer part of your estate and can’t be included as inheritance for the family.
  • Repairs and maintenance to your property are your responsibility so you must have money to do them.
  • Plans are inflexible, can’t be transferred and you may need certain permissions from the lender. 
  • You still have to pay council tax, utility bills and buildings insurance.
is equity release a good idea

Is equity release a financially stable option?

There are lots of things to consider before taking out an equity release product to pay for care fees. 

This is because they can prove to be an expensive option, due to the build up of interest you have to pay as well as set up fees. 

For this reason, it’s important that you talk to a professional financial adviser to find out if it will be suitable for you.

Equity release to fund care

Equity release schemes can be used to help self-fund home care or access your preferred standard of care home. 

Remember that as a self-funder, you will not be eligible for local authority funding for care, either at home or in a residential facility. 

Equity release to pay for home care

Equity release can be a good idea for people wanting to self-fund their care while still living at home. 

This means they remain in the comfort of their home while getting the care they need as they get older. 

Both lifetime mortgages and home reversion plans are suitable for funding types of domiciliary care, as discussed.

But planning for the care you need, plus anything unexpected, is advisable when using equity release to fund care costs.

Equity release to pay for care

What services can be paid for using equity release?

As equity release plans allow you to access cash against the value of your property, home care services can be paid for using this money. 

This could include the following domiciliary care services 

As well as making adaptations to your home for your accessibility needs, or using services such as a day centre.

benefits of equity release

Equity release to pay care home fees

You can, in theory, use an equity release plan to pay for care home fees, though it may be more trouble than it’s worth. 

If you are already classed as a self-funder but can’t afford the standard of care home you want, it could be an option.  

Otherwise, if the council are already fully or partially funding your care home costs, equity release may overcomplicate things.

If you’re wondering about using an equity release plan to reduce your assets to get accepted for funding- this counts as deprivation of assets. 

Confused about care funding?

Free Care Funding Guide Download

Will equity release cover the cost of care

Will equity release cover the cost of care?

Equity release can cover the cost of care for a short term period, but you may find that the money runs out.

In this case, you need to have a financial plan to cover the additional costs of your care, plus account for anything unexpected. 

It is advisable to estimate the overall cost of care and budget accordingly, especially if you or your loved one has a progressive condition.

This is because they are likely to need more comprehensive care as the condition progresses, which means spending more.

savings run out and care home fees

Equity release and care benefits

Increasing your savings through equity release may affect any means tested benefits or eligibility for funding. 

This means they could be reduced or stopped entirely once you receive the money from your loan. 

This could affect financial benefits for elderly such as housing benefit, income support and pension credit, amongst others.

Disclosure: You should not use this blog to make financial decisions and we highly recommend you seek professional advice from someone who is authorised to provide financial advice.

If you found this guide useful then you might like to check out these guides on:

care at home

Finding the right care

Getting your loved one the care they need when they need it can have you going round in circles.

Rather than having the same conversation about care needs, only to be let down last minute, use the Sweet Pea app to find and organise quality home care in just a few clicks. 

Enter their care needs into the app and connect with trusted care providers in your area that are ready to help. 

Start your care journey now below.

Alistair Clay Author

Author 26.04.2023

Alistair Clay

Alistair is a founding Director of Sweet Pea Care and the Managing Director of social care communications agency Arc Seven where he advises some of the UK’s biggest care providers.