The UK is in a tricky spot financially, with millions of households and homeowners across the country feeling the bite of rising inflation – and seeing little hope of reprieve on the horizon. Older homeowners in particular are growing more nervous, as those reaching pension age rightfully consider if their savings are enough for living comfortably.

More pension-age homeowners are engaging with financial products to ensure their liquidity, with equity release becoming a particularly popular way of mitigating medium-term financial shock. But what is it, and how does it work?

What is Equity Release?

Equity release is a form of financial product that enables certain homeowners to release value in their home, tax-free and in advance of any eventual sale. For a great majority of people in the UK, their home is their single biggest investment. But the value of that investment is necessarily locked up within it, only accessible through sale.

Equity release services allow eligible applicants to receive part of the value of their home, either as an annuity or as an advance lump sum, while continuing to retain ownership of their home. These advances are generally repaid with interest over a period of years, and paid in full on the eventual sale of the property. But how does equity release work, and in what forms does it come?

How Does Equity Release Work?

Equity release is only available to homeowners aged 55 or over. Further to that, there are specific iterations of equity release that certain providers will only offer to those of 60 or over. The most common iteration of equity release programme is the ‘lifetime mortgage’, which is essentially an advance loan that reflects part of your home’s value. The loans terms may differ from provider to provider, but universally allow you to retain ownership of your home until it comes time to pay.

Another slightly less popular iteration of equity release comes in the form of home reversion. Home reversion enables homeowners to sell a fraction, or the entirety, of their property to a lender for a value below the market average, and to remain as tenants. The reduction in sale value is offset by the speed of sale, and homeowners need not worry about sourcing alternate accommodation.

A Word of Caution

As with any financial product, there is an element of risk inherent to equity release mortgages. Any product or service that incurs debt, credit or interest is one that can pose difficulty to those unprepared; it is also important to note that the unpredictability of the UK’s present economic landscape adds a new dimension to this risk.

The risks posed by equity release can be easy to circumnavigate, though. In a majority of cases, equity release customers can choose to pay solely the interest, with the principal value of the equity release recouped entirely through the sale of the property on death or transition to assisted living facilities.

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