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The overall cost for comparison is 7.1% APR. The actual rate available will depend on your circumstances.

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An equity release mortgage (also known as a lifetime mortgage) is, more or less, a “reverse” mortgage. Instead of paying money to build equity in your home, you receive money for releasing that equity.

How does it Work?

There are three main criteria for an equity release mortgage—you must be a UK citizen, you must own your home and you must meet an age requirement. Most schemes require that you be over 55 but some have higher age requirements—each company has their own specific regulations. Additionally, most companies will require that your property be worth a certain amount (this can vary widely, from £40,000 to £70,000) and that you have no outstanding mortgage. Some companies may allow you to have a small outstanding mortgage as long as you pay the outstanding balance with funds obtained from the equity release mortgage. If you meet all of these requirements, you are eligible for an equity release mortgage.

An equity release mortgage works fairly simply. You can borrow between 20 and 50% of your home’s value—the exact amount you can borrow depends on the lower of you and your partner’s age. The lower the age, the less you are able to borrow.

You can choose to receive money as either a tax-free lump sum, in monthly instalments, or in smaller lump sums as you need them, and what you do with the money is entirely up to you. Instead of paying interest as with a traditional mortgage, the amount owning on the loan is allowed to accrue. Taking the money only when you need it provides an extra benefit, since you keep the balance of the loan at a minimal level, so the interest you owe will not build up as quickly as it would if you took one large lump sum payment at the start. The loan balance and the interest are paid when the property is sold, typically after death or if you decide to go into long-term care. Most equity release mortgage schemes have a fixed interest rate, but even so this is something you should check with your mortgage lender, as you can choose a scheme with a variable interest rate if you wish.

What to Look for in an Equity Release Mortgage

One of the most important things to look for when considering this type of mortgage is a scheme which guarantees that you will never owe more than the property is worth, regardless of how much interest you accrue and how the property market changes. Interest can build up quickly, so this is a particularly important point. Look for a scheme that is approved by Safe House Income Plans (SHIP). Plans approved by this trade body guarantee that you cannot build up negative equity, and that your equity release mortgage will not pass any debt on to your estate after your death.

As an alternative to a SHIP-guaranteed scheme, some companies allow you to borrow an extra sum that covers the monthly interest on the loan. This prevents the possibility of building up negative equity, and this sum is also repayable when the property is sold along with the balance of the loan.

Because your individual circumstances are unique, it’s wise to consult a financial advisor before making a final decision on whether or not to get an equity release mortgage - like any other mortgage this is a significant financial commitment.