How Does Equity Release Work?

What is equity release?

Equity release is a way to turn some of your home’s value into cash. Releasing equity effectively swaps a percentage of your property value for a lump-sum or in smaller amounts over a period of time you can spend as you wish.  Many people use equity release to raise funds for one-off events, like preparing for retirement, putting a deposit on another property or financing an expensive family event, like a wedding.

How does equity release work?

There are several choices available when it comes to deciding how to release equity.

Lifetime mortgage

The most common option is called a lifetime mortgage.

A lifetime mortgage is generally available to homeowners over the age of 55. You don’t have to have paid off your existing mortgage and you won't have to move out of your home. The process works in a similar way to other loans. You’ll effectively borrow money against the value of your property.

The loan does not have to paid back immediately it is repaid only when you  or the last named borrower in the house  passes away or moves into long-term care. Any interest builds up over time and is included in the final payment. Though, you can choose to make repayments if you wish.

You’ll also need to meet the criteria to qualify for a lifetime mortgage.

You can use our eligibility checker to find out if you qualify for our Scottish Widows Lifetime Mortgage.

Home reversion plan.

The second option is called a home reversion plan. With this scheme, you’ll sell a portion of your home to the reversion company in exchange for money. You won’t have to move out, but the reversion company receives their share when you eventually sell your house.

The percentage of your property you can sell to the reversion company depends on your age and the house’s value.

As with a lifetime mortgage, there is set criteria you must meet to be eligible for a home reversion scheme.

What is equity release used for?

How you use your tax-free cash is up to you. You can choose to receive it as a lump-sum, though some prefer to take smaller amounts over time.

People free up equity for a variety of reasons, such as:

  • Preparing for retirement.
  • A gift to a loved one.
  • A costly family event, such as a graduation or wedding.
  • Making major home improvements, like an extension or new kitchen.
  • Raising the deposit for a second property, or helping a family member to buy theirs.
  • Paying off a second mortgage, or existing debts.
  • An expensive new purchase, like a new car.
  • The trip of a lifetime, or an extended holiday.

What are the costs of equity release?

Equity release can be a great option if you need to access a large sum of cash relatively quickly. However, it only makes sense if you own a large portion of your home already. You can do this by successfully paying off your mortgage over several years.

Even still, there are costs that may come with releasing equity that you should be aware of.

These include:

  • Surveyor’s valuation
  • Solicitor fees
  • Lender’s application
  • Advice fees
  • Completion costs
  • Interest
  • Early repayment fees

Some providers, like Scottish Widows Bank, offer free advice and free valuations which can help you reduce costs.

Are you eligible for a Scottish Widows Bank Lifetime Mortgage?

You may be if:

  • all applicants are aged between 55-85
  • you are applying for a single or joint application
  • the lifetime mortgage is for your main residence
  • the property is in England, Scotland or Wales
  • you already own the property.

Find out if you’re eligible by using our eligibility checker.

As with any financial decision, there are advantages and disadvantages to releasing equity, depending on your own individual circumstances.

If you’re wondering if a lifetime mortgage could help you, it’s important to consider the advantages and disadvantages. Some examples of these are detailed below but your adviser will always discuss your needs and circumstances to decide if a lifetime mortgage is right for you. 

  • You can take a cash lump sum, or a lump sum and then smaller amounts over time.
  • You will continue to own your home until the mortgage needs to repaid upon death or long term care of the last surviving borrower. 
  • You can set aside some of your home’s value to be passed on as inheritance however this may be reduced if you take a lifetime mortgage.  
  • No monthly payment is required but interest will continue be added to the amount owed. 
  • You will have the right to move to an alternative  property (subject to lending policy and criteria at the time) without having to pay any early repayment charges. 
  • You will be protected by the ‘No Negative Equity Guarantee’ meaning your estate won’t have to repay more than what your home sells for even if you owe more.
  • Taking out a lifetime mortgage could affect your entitlement for means-tested benefits.
  • You can make some overpayments over the life of the mortgage without penalty but, early repayment charges may be payable if you want to repay more or repay the mortgage in full.  These do not apply on death or moving into long term care. 
  • Interest is accrued on the balance of the loan and then added to the total loan balance. When the time comes to repay the loan there will be less equity left in the property.


Equity release explained: FAQs