Deferred Payment Agreement or Equity Release for Care Fees

If you need to pay care home fees and most of your money is tied up in your home, there are two main ways to use that property without selling it straight away. A deferred payment agreement is offered by your council: it loans you the money to cover your fees and reclaims it when the property is eventually sold¹. Equity release is a financial product that lets you take money out of your home, usually without making regular repayments, and it is repaid when you die, move into permanent care or sell².

The two are not the same kind of thing. A deferred payment agreement is a council arrangement tied to your care fees, with an admin fee and interest charged on deferred fees³. Equity release is a regulated later-life mortgage product, sold only with financial advice and independent legal advice⁴. Which one fits depends on your circumstances, your other assets, and what you want to happen to your home and your family's inheritance.

This page sets out how each one works, what each costs, who can get each, how to apply, and the risks to benefits and inheritance. It does not recommend either route.

What a deferred payment agreement is

A deferred payment agreement is where you receive help with the cost of your care home fees from the council, on the condition that you will pay them back at a later point⁶. The council loans you the money to cover your fees and then reclaims it when the property is eventually sold¹. Repayment can also come from your estate when you die³.

To qualify, the value of your other assets, excluding your home, must be below the care funding threshold¹¹. The loan is secured against your property and is repaid when you sell the property, move into long-term care or die¹¹. Your council may offer you a deferred payment agreement so you do not have to sell immediately¹.

The council can charge an admin fee to set up the agreement, and interest can be charged on deferred fees³. The council is usually repaid from the value of your property when it is sold⁶.

What equity release is

Equity release lets you take money out of your home without selling it. The money can be released as a lump sum, or you can set up access to a flexible borrowing facility⁹. You can usually take the money as a lump sum, regular payments or a combination of both⁸.

With most equity release schemes, you the borrower are not required to make any regular repayments to the lender⁷. Anything left on the mortgage or plan will be repaid when you pass away, move into permanent care or choose to sell your home². Many plans will allow you to manage the interest by monthly repayments or overpayments¹².

With equity release, you do not need to meet a lender's affordability or income criteria, as you do with a remortgage¹³. Sometimes your health will be taken into consideration as well⁹. Equity release can provide tax-free money to help pay for home repairs, care costs, everyday living expenses or debts⁸.

The Equity Release Council is a not-for-profit organisation that represents different types of firms involved in equity release¹⁴. It is not the regulator and does not have required timescales within which to respond¹⁵.

Deferred payment or equity release: how each one works for care fees

The two routes move money in different ways, and that difference matters for care fees.

A deferred payment agreement is tied to your care. The council pays the care home and the debt builds up against your property, repaid when it is sold or from your estate⁶. It is designed for the specific situation where your home is your main asset and you need to pay care fees.

Equity release gives you money directly. You can take it as a lump sum, regular payments or a combination⁸. A lump sum is considered as capital and a regular payment is considered as income⁸. That distinction matters if you claim means-tested benefits.

There is an important limit on equity release for care. If the property owner or owners are moving into long-term care and leaving their home, an Equity Release mortgage would not be permissible¹⁶. In other words, equity release is generally for people staying in their home, not for someone moving permanently into a care home and leaving the property empty.

If you do move into long-term care and the property is sold, the amount you borrowed, plus interest, will be paid back to your equity release provider¹⁶. The time allowed to sell the property when moving into long-term care is typically between 6 months and 1 year¹⁶.

Costs, interest and fees

The costs of the two routes are worked out differently.

For a deferred payment agreement, the council can charge an admin fee to set up the agreement, and interest can be charged on deferred fees³. The rate and the fee are set by your council, so ask for them in writing.

For equity release, you will have to pay application, legal and other fees, and these can be high⁸. Different fees are likely to be charged when you enter into an equity release agreement, including a survey fee, application fee, legal fee and advice fee, with amounts depending on the provider and property value¹⁷. Arrangement fees can reach £1,500 to £3,000 in total, depending on the equity release plan being arranged¹⁸. You need to pay the application fee when your equity release transaction goes through, and you may be able to pay for it by borrowing a bit extra under your equity release plan¹⁷.

There is also the cost of ending the arrangement early. If you want to end an equity release agreement early, you might have to pay an early repayment charge, which can often be a significant amount¹⁸. Some providers charge for paying back the plan in full². Early repayment charges on equity release plans vary, but they can be as high as 25% of the amount borrowed¹⁹. Changing your mind can prove costly, as repaying your loan early often triggers an early repayment charge²⁰. Early repayment charges may apply and should be checked when choosing a plan¹².

Who can get each option

For a deferred payment agreement, the value of your other assets, excluding your home, must be below the care funding threshold¹¹. The loan is secured against your property¹¹. Your council may offer you one so you do not have to sell immediately¹.

For equity release, you are required to get professional financial advice before purchasing⁴. You are required to take financial advice before using equity release, so the adviser should discuss its impact on benefits¹⁰. All customers must be given independent legal advice before entering the contract⁷. ERC members must make sure that you have received independent legal advice before you enter into an equity release scheme¹⁴.

If you are married, in a civil partnership or living with someone else as a partner and you are both eligible by age, you can take out a joint equity release plan¹⁶. If the plan is in your name only, then unless the mortgage can be repaid in full the property will have to be sold and your partner must find somewhere else to live¹⁶.

Equity release can be used to purchase a property, though providers may have restrictions about property type and the process can take longer than raising a standalone Equity Release mortgage²¹.

How to apply

For a deferred payment agreement, the starting point is your council. Your council may offer you a deferred payment agreement so you do not have to sell immediately¹. The council loans you the money to cover your fees and reclaims it when the property is eventually sold¹. Ask your council for the admin fee and the interest rate in writing before you sign.

For equity release, the process starts with advice. A suitably qualified and authorised adviser will need to take detailed information about your situation and requirements, then consider all options, including mainstream mortgages, Retirement Interest Only mortgages and other options, before making a recommendation to you²². A fully qualified financial adviser should help you to understand the steps involved and talk you through your options²³. Advisers should hold one of the following qualifications: CeRER (Certificate in Regulated Equity Release), CER or ERMAPC⁴.

Equity release providers must assess whether a plan is appropriate to the customer's needs and circumstances, and explain that this assessment is based on the customer's current circumstances, which may change in the future²³. An execution-only sale is possible only where the customer has rejected the advice given, identified the particular equity release transaction they wish to purchase, been informed in a durable medium that they will not benefit from the protection of the rules on assessing suitability, and, where there has been spoken or other interactive dialogue, confirmed in writing that they are making a positive election to proceed¹⁶.

Risks and effects on benefits and inheritance

Equity release can affect your tax position and your entitlement to means-tested benefits, like income support and Universal Credit⁹. It can impact any means-tested benefits you are entitled to, for example Pension Credit and reduced council tax²⁰. Having savings in the bank that you do not need could affect your eligibility for means-tested benefits¹².

If your equity release company pays some of the funds directly to your mortgage lender to clear the mortgage on your home, those funds are not usually treated as savings, but money released can be treated as savings for means-tested benefits such as Universal Credit and Pension Credit¹⁷. While the proceeds from equity release are in your account, they could reduce your eligibility for getting Pension Credit¹⁰. A lump sum is considered as capital and a regular payment is considered as income⁸.

On inheritance, the use of an equity release scheme will reduce the value of your estate¹⁶. Equity release reduces the value of your estate and the amount that will go to the people named as beneficiaries in your will²⁴. Taking out an equity release plan could leave your family with little or nothing to inherit from your property²⁵. Any future inheritance will either be reduced or eliminated¹².

If the plan is in your name only, then unless the mortgage can be repaid in full the property will have to be sold and your partner must find somewhere else to live¹⁶. Family wishing to keep the property must discuss with the provider whether they can pay off the remaining debt¹⁶. Your equity release provider will be entitled to recover as much as possible of the amount they had lent you, often meaning the property must be sold¹⁶.

With equity release, it is not so much lenders as borrowers who may be at risk⁷. The amount of equity in your property can reduce your benefits once you move out²⁸.

Where to get free, independent help

Independent Age runs a free helpline²⁹. The Equity Release Council provides access to help and information on equity release³⁰. You can also get information from individual Equity Release Council members or from other qualified advisory firms²⁵.

If something goes wrong with an equity release plan, the Financial Ombudsman Service can look at complaints. Redress may include telling a business not to apply an early repayment charge, refunding the charge, or compensation for distress and inconvenience¹⁸. The Equity Release Council is not the regulator and does not have required timescales within which to respond¹⁵.

For care fees specifically, your council is the first point of contact for a deferred payment agreement¹. For benefits you may be entitled to, including Pension Credit, check what you can claim before releasing any money, because released money can be treated as savings¹⁷.