Equity Release: How It Works and What It Costs

The defining feature is that you generally make no monthly payments. Interest is added to the balance and compounds, which is where the cost sits.

The compounding effect

Because interest is added rather than paid, the balance grows on itself. At typical rates the debt can double over a period in the region of fifteen years, and double again over a similar further period.

A modest amount released at sixty-five can therefore consume a substantial share of the property's value by eighty-five, particularly if house prices grow more slowly than the interest rate.

This is not hidden, and providers must illustrate it. It is simply harder to grasp than a monthly payment, which is why the illustration deserves careful reading.

Protections that matter

A no-negative-equity guarantee means the debt can never exceed the property's sale value, so no debt passes to your estate beyond the house. Products from providers following recognised standards generally include this.

The right to remain in the property for life, or until moving into permanent care.

The ability to move to another suitable property, taking the arrangement with you, subject to the lender's criteria.

Optional partial repayments without penalty, which many modern products allow and which substantially reduce the compounding if used.

Alternatives worth exhausting first

Downsizing releases equity without any borrowing cost, though it involves moving and transaction costs.

A retirement interest-only mortgage requires monthly interest payments, preventing compounding, and suits those with sufficient income.

Unclaimed benefits and grants. Substantial sums go unclaimed by older households in many countries, and a benefits check costs nothing.

Support from family, structured properly with legal advice, is sometimes preferable to commercial borrowing.

The costs beyond interest

Arrangement fees, valuation fees, legal fees and adviser fees. These are typically several thousand in total.

Early repayment charges can be substantial and are sometimes linked to market rates, making them unpredictable. Read these carefully, since circumstances change.

Effects people do not anticipate

Releasing capital can affect entitlement to means-tested benefits, because savings are assessed where property is not.

It reduces what passes to beneficiaries, which is a legitimate choice and one worth discussing with family beforehand rather than leaving as a surprise.

It can complicate later moves into care, since the property may need selling at a time not of your choosing.

Getting advice

Regulated advice is generally required, and using an adviser who covers the whole market rather than one provider matters.

Involve family in the conversation where relationships allow. Independent legal advice is normally mandatory and is a genuine protection rather than a formality.