When is equity release worth it?

Equity release is a way for over-55s to access some of the money in their home, while continuing to live there. 

If you're looking to address a pension shortfall, or want to make home improvements, it can appear attractive. It promises money in your pocket with no monthly repayments. 

However, it's also an expensive lifetime commitment which can end up costing you your entire home.

Here we explain how and when to consider it.

Is equity release right for you?

Speak to the experts at HUB Financial Solutions, they'll be able to help

Go to HUB Financial Solutions

Wie es funktioniert

The most common type is a lifetime mortgage, when you borrow a portion of your home’s value and repay it when you sell the property, die, or go into care. Alternatively you can take out a home reversion, which involves you selling some or all of your home while you live in it.

It’s vital you do your sums. The older you are the more you can borrow, but the maximum lifetime mortgage size is around 60% of the value of your property. If you take a lump sum then interest will be charged on all of it at a fixed rate. 

If you take chunks of cash when you need it – known as income drawdown – you only pay interest (which can vary each year) on the money you’ve taken.

Either approach can be very expensive as the interest ‘rolls up’ year-on-year. As long as the provider is registered with the Equity Release Council (ERC), the debt will never exceed the value of the property – but you won’t be able to pass on your home.

It’s possible to pay off a lifetime mortgage early, but there are often steep penalties for doing so. You can usually make partial repayments each year penalty-free though.

• Find out more: What is equity release? Lifetime mortgages, costs and fees explained

Is it worth it?

We’ve crafted three scenarios – two lump sum and one drawdown – to show what taking out a lifetime mortgage could mean for your finances and your home. 

In each case we used the following assumptions: an annual fixed interest rate of 7% (the market average on 2 April, according to Moneyfacts), a property value of £280,660 (February UK average, HM Land Registry), and annual house price growth of 4.32% (based on average annual house price growth over the past five years, HM Land Registry).

These scenarios are just a starting point. Before using equity release, you’re required to get professional financial advice.

Scenario 1 – Extending your home

Home improvements can come in all shapes and sizes, from a bathroom revamp to a new conservatory. As a starting point, a single-storey pitched-roof extension of 4x4 metres costs £51,750 on average, according to the Royal Institution of Chartered Surveyors.

Let’s say you decide to borrow this amount through a lifetime mortgage held against your home. This amounts to an 18.4% LTV (loan to value ratio).

After 10 years, your debt will already have almost doubled to £101,800. In the case of a 65-year-old who lives until the age of 85, the debt pile will have ballooned to £200,256, or 30.6% of the value of their home.

For a 55-year-old, it will have swelled to an eye-watering £393,934 by age 85 and would consume nearly 40% of their home’s value.

Bear in mind this assumes a fairly buoyant property market where your home’s value grows by 4.32% each year – far from guaranteed.

A more subdued market with an annual growth rate of 2% would see a 65-year-old owing nearly half the value of their home. A 55-year-old would end up on the hook for more than three quarters of their home’s value (77.5%).

Home extension - proportion of your home you'd own by age 85

Scenario 2 – Helping family

A typical example of helping a family member would be giving a younger relative enough money to get onto the housing ladder. 

According to the property site Zoopla, the average deposit paid by a first-time buyer for a three-bed home in 2023 was £34,500. This amounts to an LTV of 12.3% against our assumed property value.

For a 65-year-old, by the time they reach 85 the debt will have grown to £133,504, or 20.4% of their property’s eventual value. 

For a 55-year-old, the debt will hit £262,623 by the time they reach 85, equal to just over a quarter (26.3%) of their home’s value.

In a more subdued market, the sums are far less favourable. The 65-year old would end up owing just under a third of their home’s value and the 55-year old over half.

As a quick example of how even small partial repayments can dramatically reduce your final bill; if our 55-year-old were to pay back just £1,200 each year, their final debt would be £141,335 instead of £262,623.

Helping family - proportion of your home you'd own by age 85

Scenario 3 – Funding retirement

Putting a number on this one is tricky, but our own research last year into retirement funding found that the average single-person household needs about £20,000 per year for a comfortable retirement. 

Let’s say you want to fund 25% (£5,000) of that each year through an equity release drawdown loan, to top up income from pensions.

Drawdown equity release works slightly differently in that you only pay interest on the amount you ‘draw’, while the rest sits in reserve. Interest rates are usually variable. For simplicity’s sake we’ll assume a rate of 7% each year.

A 65-year-old wanting to draw £5,000 each year would end up with debts of £224,326 by the time they reach 85, equal to just over a third of their home’s eventual value. 

A 55-year-old would end up owing a huge £510,365, equal to 51.1% of their home’s value. 

It’s here that the risk posed by a subdued property market becomes unnervingly apparent. 

We found the 55-year-old would owe 100.4% of their home’s value – though at least with the ERC’s rule that the debt can’t exceed the home’s value, this falls to 100%. The 65-year-old would owe 53.8% of their home’s value.

Funding retirement - proportion of your home you'd own by age 85

What are the alternatives?

Equity release is most suitable if you’re older, own an expensive property outright that’s expected to increase in value, and you don’t intend to pass it on when you die. 

1. Downsizing - Our recent investigation found you can potentially unlock hundreds of thousands of pounds by moving to a smaller property, even after paying stamp duty.
2. Remortgaging - Increasing numbers of lenders offer retirement interest-only mortgages (RIOs). These enable you to pay off the interest on the loan each month (perhaps with money from your pension), with the original value of what you borrowed repaid when you die or move out.
3. Personal loan or credit card - For smaller amounts, borrowing via an unsecured personal loan or interest-free purchase credit card could be much cheaper than equity release, as long as you can make the agreed repayments.
4. Rent a room - If you have a spare room in your home that you’d be happy to rent out, the government’s ‘Rent a Room’ scheme lets you earn up to £7,500 a year tax-free. The tax exemption is automatic, so you only have to fill in a tax return if you earn more than £7,500 in any year.

Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665  and is an Introducer Appointed Representative (FRN 610689) of the following:

1. Inspop.com Ltd for the introduction of non-investment motor, home, travel and pet insurance, who are authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 

2. LifeSearch Partners Limited (FRN656479), for the introduction of Pure Protection Contracts and Private Health Insurance, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts and Private Health Insurance Contracts.  LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386.

3. HUB Financial Solutions, for the introduction of equity release advice, who are authorised and regulated by the Financial Conduct Authority (‘FCA’) to provide advice and guidance on financial products for those who have retired or are approaching retirement (FCA Firm Reference Number: 455713). HUB Financial Solutions is registered in England and Wales to Enterprise House, Bancroft Road, Reigate, Surrey RH12 7RP, company number 05125701.

4. Alan Boswell Insurance Brokers Ltd (FRN 301), for the introduction of non-investment landlord insurances, who are authorised and regulated by the Financial Conduct Authority to provide advice and arrange insurance contracts. Alan Boswell insurance brokers Ltd is registered in England at Prospect House, Rouen Rd, Norwich NR1 1RE, company number 02591252.

Other financial services:

Mortgage service provided by London & Country Mortgages (L&C), Unit 26 (2.06), Newark Works, 2 Foundry Lane, Bath BA2 3GZ. London & Country are authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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