Equity release pros and cons

Equity release is a way for homeowners aged 55 and over to access the value tied up in their property without needing to sell or move. You borrow against your home and receive the money as a tax-free lump sum, regular drawdown payments, or a combination of both.

There are two main types of equity release:

• Lifetime mortgages: The most common type, accounting for over 99% of all equity release plans. You take out a loan secured against your home and retain full ownership. Interest rolls up over the lifetime of the plan, and the loan plus accumulated interest is repaid when you die or move into long-term care.
• Home reversion plans: You sell part or all of your home to a provider at below market value in exchange for a tax-free lump sum. You retain the right to live in the property rent-free for life, but your estate only benefits from the share you kept.

To qualify for a lifetime mortgage, you typically need to be at least 55, own a property worth at least £70,000, and have little or no outstanding mortgage. If you do have a mortgage, equity release can pay it off as part of the process. The amount you can release depends on your age and property value: a 65-year-old might release up to 35% to 45% of their home's value.

Equity release offers several genuine benefits for homeowners who need to access cash in later life. Here are the main advantages:

• Tax-free cash: The money you release is not treated as income, so you pay no income tax on it. This applies whether you take a lump sum or use a drawdown facility.
• No monthly repayments required: With a standard lifetime mortgage, interest rolls up and is repaid from the sale of your home. You do not need to make any monthly payments, although many plans now offer voluntary payment options.
• Stay in your home for life: You retain the right to live in your property until you die or move into permanent long-term care. The provider cannot force you to move.
• No-negative-equity guarantee: Plans from Equity Release Council members guarantee you will never owe more than your home is worth. If property values fall and the debt exceeds the sale price, the shortfall is written off.
• Use the money for anything: Common uses include home improvements, paying off an existing mortgage, gifting to family, supplementing retirement income, holidays, or funding care needs.
• Drawdown reduces interest costs: With a drawdown lifetime mortgage, you only pay interest on money you have actually withdrawn. Keeping funds in reserve until you need them can significantly reduce the total interest charged.

Equity release is a major financial decision with significant drawbacks. You should understand all of these before proceeding:

• Compound interest erodes your estate: Interest is charged on interest, so the debt grows quickly. At 6.5%, a £100,000 loan becomes roughly £200,000 after 11 years and £400,000 after 22 years. This is the single biggest cost of equity release.
• Reduced inheritance: The loan and accumulated interest are repaid from the sale of your home when you die or move into care. This directly reduces what you leave to your family. Depending on how long the plan runs, there may be little or nothing left.
• Early repayment charges: If you want to repay the plan early, you may face significant penalties. These vary by provider but can range from 1% to 25% of the amount repaid, depending on gilt rates at the time. Some plans offer fixed ERCs that reduce over time.
• Impact on means-tested benefits: Releasing equity can affect your entitlement to Pension Credit, Council Tax Reduction, Universal Credit, and other means-tested benefits. The lump sum counts as capital, and if it pushes your savings above threshold limits, you could lose benefit entitlements.
• Higher interest rates than standard mortgages: Lifetime mortgage rates are typically higher than standard residential mortgage rates. As of mid-2026, rates sit around 6.5% to 7%, compared to 4% to 5% for standard residential mortgages.
• Moving home restrictions: While you can usually port your equity release plan to a new property, the new home must meet the provider's criteria. Downsizing significantly could trigger partial repayment and associated charges.

Compound interest is the most important factor to understand before taking equity release. Unlike a standard mortgage where you make monthly payments that cover the interest, a lifetime mortgage adds unpaid interest to the loan balance each month. You then pay interest on the new, larger balance. This creates exponential growth.

Consider a practical example. A 67-year-old releases £80,000 at 6.5% interest. After 10 years at age 77, the debt has grown to roughly £150,000. After 20 years at age 87, it has reached approximately £282,000. If the property was originally worth £300,000 and grew by 2% a year, it would be worth around £445,000 after 20 years, leaving roughly £163,000 for the estate. Without equity release, the full £445,000 would pass to beneficiaries.

You can reduce the impact of compound interest in several ways:

• Make voluntary interest payments: Many modern plans let you pay some or all of the monthly interest, preventing the debt from growing. Even partial payments make a significant difference over time.
• Use drawdown instead of a lump sum: Only borrow what you need, when you need it. Interest only accrues on money you have actually withdrawn.
• Choose the lowest rate available: Even a 0.5% difference in rate saves thousands over the life of the plan. An equity release advisor can compare the whole market for you.

Equity release is not right for everyone, but it can be a good option in specific circumstances. It tends to work best for people who:

• Need to supplement retirement income: If your pension does not cover your living costs and you have no other savings or investments to draw on, releasing equity can bridge the gap.
• Want to pay off an existing mortgage: If you have an interest-only mortgage ending and no repayment vehicle, equity release can clear the balance and remove the risk of repossession.
• Want to gift money to family now: Some people prefer to help children or grandchildren with house deposits or other costs while alive rather than leaving everything in a will. This can also have inheritance tax planning benefits.
• Need to fund home adaptations: Making your home suitable for later life, such as installing a stairlift, wet room, or ground-floor bedroom, can allow you to stay independent for longer.
• Have no dependants relying on an inheritance: If leaving an inheritance is not a priority, the impact on your estate matters less.

Equity release is generally less suitable if you are under 60 (because interest compounds for longer), if you have dependants living with you (they may need to leave the property), or if you might need to move into a smaller property in the near future.

Before committing to equity release, consider whether any of these alternatives might work better for your situation:

• Downsizing: Selling your home and buying a smaller, cheaper property releases equity without interest charges. You keep the full difference and avoid ongoing costs. The drawback is the upheaval of moving and associated costs like stamp duty, estate agent fees, and conveyancing.
• Retirement interest-only mortgage: Available to over 55s, you pay monthly interest but never repay the capital. The loan is repaid when you die or move into care. Rates are lower than equity release because you are servicing the interest, but you need sufficient income to afford the payments.
• Unsecured personal loan: For smaller amounts, a personal loan may be cheaper overall, especially if you can repay it within a few years. No charge on your property is required.
• Benefits check: Many older homeowners miss out on benefits they are entitled to. Pension Credit, Attendance Allowance, and Council Tax Reduction could provide regular income without borrowing. Contact your local Citizens Advice or use the government's benefits calculator.
• Family assistance: Discussing your financial needs openly with family can sometimes lead to arrangements that work for everyone, whether that is a private loan, gifting, or shared living arrangements.

A qualified advisor can help you compare these options against equity release to find the best solution for your circumstances. The costs of equity release should be weighed against all alternatives before proceeding.