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Equity Release

Also known as: Lifetime Mortgage, Home Reversion

Definition

Equity release is a financial product allowing homeowners aged 55+ to access cash from their property's value while continuing to live there, with the loan typically repaid after death or moving into care.

Understanding equity release is essential for estate planning because it significantly reduces the inheritance you can leave to beneficiaries, requiring careful consideration of how it affects your will.

What Does Equity Release Mean?

Equity release encompasses two regulated financial products that allow UK homeowners aged 55 and over to access the value tied up in their property without selling or moving out. Under the Financial Conduct Authority's Mortgage and Home Finance: Conduct of Business sourcebook (MCOB Chapters 8 and 9), equity release transactions include lifetime mortgages and home reversion plans. Both products are strictly regulated, requiring independent financial advice before proceeding. The Equity Release Council sets industry standards that provide additional consumer protections beyond FCA regulation, including the no negative equity guarantee, secure tenure for life, and fixed or capped interest rates.

A lifetime mortgage—representing 99% of the UK equity release market—allows you to borrow money secured against your property while retaining full ownership. Interest compounds and rolls up over time with no required monthly repayments, though some plans allow voluntary payments. The loan and accumulated interest are repaid from your property's sale proceeds when you die or move into long-term care. David, aged 68, owns a property valued at £350,000 and takes a £60,000 lifetime mortgage at 5.5% interest. After 15 years, the debt has grown to approximately £127,000 through compound interest. When his property sells for £450,000, his estate receives £323,000 after loan repayment—a reduction of £127,000 compared to the full property value.

Home reversion plans—accounting for just 1% of the market—involve selling a percentage of your property (typically 30-60%) to a provider in exchange for a lump sum or regular payments. You retain the right to live there rent-free for life, but the provider receives their corresponding percentage when the property is sold. Margaret, aged 72, sells 50% of her £280,000 property for £70,000. When she dies 10 years later and the property sells for £360,000, the provider receives £180,000 (50% of the sale price), leaving £180,000 for her estate—significantly reducing her children's inheritance despite property price growth.

Equity release fundamentally affects your estate planning and the inheritance you can leave. Compound interest significantly erodes property equity over time—for example, borrowing £100,000 at 6% becomes approximately £201,000 debt in 12 years. You must update your will after taking equity release to reflect the reduced estate value your beneficiaries will actually receive. The released funds can reduce Inheritance Tax liability if your estate falls below the nil-rate band (£325,000), but only if the money is spent rather than saved. Additionally, released capital counts as savings for means-tested benefits like pension credits, potentially affecting your entitlement. The no negative equity guarantee ensures your estate will never owe more than your property's sale value, protecting beneficiaries from inheriting debt. Many modern plans offer inheritance protection options, allowing you to ring-fence a guaranteed amount (such as £100,000) for beneficiaries regardless of interest accumulation.

Common Questions

"How does equity release affect the inheritance I leave to my family?" Equity release reduces the value of your estate because you're borrowing against your property, and the loan plus interest must be repaid when you die or move into care. However, many modern plans offer 'inheritance protection' allowing you to ring-fence a guaranteed amount for beneficiaries. The Equity Release Council's 'no negative equity guarantee' ensures your beneficiaries will never inherit debt.

"What's the difference between a lifetime mortgage and a home reversion plan?" With a lifetime mortgage, you retain full ownership of your home and borrow money secured against it, with interest rolling up until repayment. With a home reversion plan, you sell a percentage of your property (typically 30-60% of its value) to a provider in exchange for a lump sum or regular payments, with no interest charges but reduced ownership and inheritance potential.

"Can I lose my home with equity release?" No. All Equity Release Council members guarantee your right to remain in your property for life or until you move into long-term care, provided you maintain the property and comply with the plan terms. This 'secure tenure for life' is a core consumer protection standard in the regulated UK equity release market.

Common Misconceptions

Myth: Equity release means I'll lose ownership of my home and the provider can force me to move out.

Reality: With a lifetime mortgage (99% of the UK market), you retain full ownership of your property and have a guaranteed right to live there for life or until you move into long-term care. This 'secure tenure for life' is a core Equity Release Council standard that all member products must include. Only with the rare home reversion plan do you sell a share of your property, but even then you have a legal right to remain.

Myth: Equity release will wipe out my entire inheritance and my family could even inherit debt.

Reality: While equity release does reduce your estate value, the 'no negative equity guarantee' (mandatory for all Equity Release Council members since 1991) means your estate will never owe more than your property's sale value—your beneficiaries cannot inherit debt. Additionally, many modern plans offer 'inheritance protection' allowing you to ring-fence a guaranteed amount (such as £100,000) for beneficiaries regardless of interest accumulation.

  • Equity: The portion of your property's value that you own outright, which equity release allows you to access as cash while continuing to live there.
  • Mortgage: Unlike a standard mortgage with monthly repayments, a lifetime mortgage typically has no required monthly payments, with interest rolling up until the property is sold.
  • Main Residence: Equity release is only available on your main residence—the property you live in as your primary home in the UK.
  • Inheritance Tax: Equity release reduces your estate value, which may lower or eliminate Inheritance Tax liability if it brings your estate below the nil-rate band thresholds.
  • Estate Value: When calculating your estate value for will planning purposes, you must account for any equity release loan and accumulated interest deducted from your property's sale proceeds.

Need Help with Your Will?

If you've taken equity release or are considering it, your will must reflect the reduced estate value your beneficiaries will actually inherit. Understanding how equity release affects your estate planning ensures accurate will provisions and realistic inheritance expectations for your family.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.