Equity Release Explained in Plain English: How It Works & Costs

Lifetime mortgage or home reversion?

With a lifetime mortgage, you normally retain ownership and borrow against your main home. Many products are available from age 55, but minimum ages, property requirements and borrowing limits vary. An existing mortgage normally needs to be cleared as part of completion, reducing the cash left for you.

A home reversion plan involves selling all or part of your home to a provider, usually for less than its current market value. You receive a right to remain under the plan’s terms, commonly rent-free. There is no mortgage interest on the share sold, but the provider receives that share of the eventual sale proceeds, including any growth. You no longer own the share you sold.

What happens from first conversation to completion?

1. Discuss why you need the money, your income, health, family priorities and alternatives with a suitably qualified adviser. A conversation does not commit you to borrowing.
2. Compare a personalised illustration, including the interest rate, fees, projected balance, repayment conditions and any inheritance protection. Consider taking family into the discussion if you wish.
3. The provider assesses the property and application. Independent legal advice helps you understand the contract, rights of occupation and implications for anyone living with you.
4. At completion, an existing mortgage is normally repaid first. You receive the remaining agreed funds. Keep the documents and review your plans if your circumstances change.

How rolled-up interest grows

When interest is added to the loan rather than paid, later interest is charged on both the original borrowing and the interest already added. This is compounding. The table is a simple annual illustration, not a current rate or a personalised quote. Real contracts may calculate interest more frequently.

Taking smaller amounts through drawdown can reduce interest compared with taking everything at once, because interest generally starts when money is drawn. Later withdrawals may have a different rate and depend on the plan’s terms.

Costs and voluntary repayments

Ask for all costs in pounds: adviser fees, provider arrangement fees, valuation costs, legal fees and any early repayment charges. A fee added to the loan may itself attract interest. Compare the total long-term cost, not just the cash available today.

Some plans allow interest payments, partial capital repayments or both. Contractual limits and charges differ; do not assume a universal 10% allowance. Under relevant Equity Release Council standards, customers have a right to make penalty-free repayments subject to provider limits. Paying all the interest can prevent roll-up, but only while those payments cover the interest due.

Moving home, repayment and safeguards

A lifetime mortgage is normally repaid from a sale when the last borrower dies or moves permanently into long-term care, under the contract’s terms. Ask how long the estate has to repay and what happens to a partner or other occupant who is not a borrower.

Moving is not always straightforward: a replacement home must meet the provider’s criteria, and a partial repayment may be needed. Repaying early for another reason can attract charges. Ask which death, care and moving circumstances qualify for a waiver under your particular plan.

A no-negative-equity guarantee on a qualifying Council-standard plan limits the debt recovered to the property’s sale proceeds, subject to its conditions. It does not guarantee any inheritance. Review benefits, care-funding implications and alternatives before deciding.