TL;DR
Equity release compounds interest on the outstanding loan for the lifetime of the arrangement, potentially doubling or tripling the debt over 15-25 years. It reduces the inheritance left to family and can affect means-tested benefit entitlement
Last reviewed: June 2026 | Sources: Property
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Property Key Facts: Equity Release Regulated advice: mandatoryInterest: compounds for lifetime of loanNo negative equity guarantee: ERC-standard policiesBenefit impact: can affect means-tested benefitsRegulator: FCA / ERC |
What equity release is
Equity release allows homeowners aged 55 and over to access the equity in their property without selling. The most common form is a lifetime mortgage, where a loan is secured against the property. Interest rolls up (compounds) throughout the loan term and is repaid, along with the principal, when the last borrower dies or moves into long-term care. Home reversion plans, where a share of the property is sold to a provider, are less common.
The risks most people do not check
Compound interest can double or triple the debt. At a four percent compound interest rate, a £100,000 equity release loan grows to £219,000 after 20 years without any repayment. At five percent, it grows to £265,000. The Equity Release Council's product standards include a no-negative-equity guarantee, meaning the debt cannot exceed the property value, but the compound growth significantly erodes the inheritance available.
It affects means-tested benefits. Releasing equity increases liquid assets, which can reduce or eliminate entitlement to means-tested benefits including Pension Credit, Council Tax Support and local authority care funding. Model the benefit impact before proceeding.
Early repayment charges can be very significant. Lifetime mortgages carry early repayment charges if the loan is repaid early, including where the homeowner moves to a smaller property or needs to repay for other reasons. ERCs on equity release products can be very high, particularly in the early years.
Family should be involved in the decision. Equity release reduces the inheritance available to beneficiaries. Major decisions of this type are generally better made with family awareness, even if the homeowner is not obligated to consult family.
What to verify before proceeding
Regulated advice from an FCA-authorised adviser who is a member of the Equity Release Council is mandatory for ERC-standard products. Model the compound interest projections over 10, 20 and 30 years. Assess benefit eligibility impact. Consider downsizing as an alternative before committing.
Where to complain
Equity release complaints go to the Financial Ombudsman Service. ERC member firms are also subject to ERC standards complaints process.
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Disclaimer This article is for information only and does not constitute regulated financial advice. Always verify current terms with relevant providers and seek regulated advice for your specific circumstances. Kael Tripton Ltd is an independent editorial publisher and is not regulated by the FCA. |
Frequently asked questions
What is the no-negative-equity guarantee?
Equity Release Council member products include a guarantee that the amount owed will never exceed the value of the property. The borrower or their estate will never owe more than the sale proceeds of the home, even if compound interest causes the debt to exceed the property value.
Can I make voluntary repayments to reduce the compound interest?
Many modern lifetime mortgages allow voluntary repayments of up to 10 percent of the outstanding balance per year without ERC. Making repayments reduces the compound growth significantly. Check whether voluntary repayment is available on the specific product.
Can I move house if I have equity release?
Most ERC-standard lifetime mortgages are portable to a new property subject to the new property meeting the lender's criteria. If the new property does not meet criteria or is of lower value, an ERC may apply on the portion that cannot be ported.
Does equity release affect inheritance tax?
Equity release reduces the net value of the estate as the loan is deducted from the property value on death. This can reduce or eliminate an inheritance tax liability. However, if the released equity is gifted to family within seven years of death, those gifts may be subject to IHT under the seven-year rule.
What are the alternatives to equity release?
Downsizing to a smaller property is the most straightforward alternative and typically produces a larger capital sum. Retirement interest-only mortgages allow interest-only repayment without compound growth. Local authority grants may be available for home adaptations. Explore all options with an independent financial adviser.
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Sources FCA: Equity Release Consumer Information |
