The downsides of releasing equity from your home

Equity release lets you take money out of your home without moving, and on a lifetime mortgage you normally make no monthly repayments. That is the appeal. The cost is that the interest is added to the loan instead, so the amount you owe grows every year, and the money comes out of your estate when the plan ends. The amount you borrow plus any rolled-up interest can never go above the value of the home when it is sold at the end of the plan, provided the provider meets the Equity Release Council's product standards¹. That guarantee protects you from owing more than the property is worth. It does not stop the debt growing, and it does not stop the debt swallowing most of the value of the property.

The other downsides are less often spelled out. Equity release reduces the value of your estate and the amount that goes to the people named in your will². Money released can be treated as savings for means-tested benefits such as Pension Credit, Universal Credit and Council Tax Reduction, which can cut or remove them³. There are application, legal and other fees, and these can be high³. Ending a plan early can trigger an early repayment charge, which can often be a significant amount⁴.

This page sets out what can go wrong, in the order it tends to matter: how the debt grows, what it does to an inheritance, what it does to benefits and care charges, what it costs to set up and to leave, and where to get help. For how the plans themselves work, see equity release and lifetime mortgages explained.

Interest rolls up: how the debt grows when you make no repayments

On a lifetime mortgage you do not make monthly repayments, so the interest is added to the balance and itself starts to attract interest. The debt grows over time and can erode the value of your property⁷. Because of the compounding of interest, making no repayments means you end up paying far more than you borrowed, which could wipe out your property's value entirely⁸.

That is the central trade-off. The longer you live and the longer the plan runs, the larger the share of the property the debt takes. A plan taken out in your sixties and running for twenty-five years behaves very differently from one running for ten. The no negative equity guarantee caps the damage at the value of the home, but it does not preserve any of that value for you or your estate.

Some plans let you pay some or all of the interest as you go, which slows the growth, and some let you make ad hoc payments. Where a plan allows this, the effect on the final balance can be substantial. The general principle is the same one that applies to any debt: small repayments may not cover any interest or charges, and if that happens the amount you have to repay and the time it takes to pay it off can increase⁹.

If you are weighing up whether to pay interest now or let it roll up, the choice is set out in paying interest on a lifetime loan: roll-up, optional and fixed payment plans.

Less to leave behind: the effect on your estate and inheritance

The use of an equity release scheme will reduce the value of your estate¹⁰. Equity release reduces the value of your estate and the amount that will go to the people named as beneficiaries in your will². Taking out a plan could leave your family with little or nothing to inherit from the property¹⁰, and any future inheritance will either be reduced or eliminated⁵.

The mechanics matter here. On a lifetime mortgage, your family will not automatically inherit the property following your death. The provider is entitled to recover as much as possible of the amount it lent, which often means the property must be sold¹⁰. What is left after the loan and rolled-up interest are repaid is what passes to the estate.

Some plans allow you to ring-fence part of the property's future value so it is kept back for inheritance. For both main types of plan, you may be able to protect some of the value of your home as inheritance, known as ring-fencing³. Inheritance protection protects some of the property's future value⁵. It is not free: protecting a share usually means releasing less money now, and it does not restore value the plan has already taken.

If leaving something behind matters to you, the honest position is that equity release and a large inheritance are in tension. The Equity Release Council's own consumer guide puts it plainly:

Means-tested benefits and council care charges can be reduced

This is the downside people most often miss. Money released can be treated as savings for means-tested benefits such as Universal Credit and Pension Credit¹². If you receive any means-tested benefits, they may be reduced or lost entirely, and those include income-related Employment and Support Allowance and Council Tax Support². Equity release can impact any means-tested benefits you are entitled to, for example Pension Credit and reduced council tax¹³.

There is one important exception. 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 savings¹². That is why using equity release to repay an existing mortgage is treated differently from taking the same money as cash.

The same logic applies to care. Because the released money counts as capital, it can affect what you pay towards council care charges, and the value tied up in the property is no longer available to offset against those charges in the way it was before. Having savings in the bank that you do not need could affect your eligibility for benefits⁵.

Two practical points. First, report any change in your circumstances to the office paying your benefit, because entitlement is worked out on the information they hold¹⁴. Second, the rules differ across the UK: the benefits system is largely the same in England, Scotland and Wales, while Northern Ireland runs its own arrangements through nidirect, and Scotland has separate help such as the Home Owners' Support Fund⁹. If you are on a low income and considering equity release, free benefits advice before you sign is worth more than any illustration.

Fees and charges: application, survey, legal and adviser costs

Setting up equity release is not cheap. You will have to pay application, legal and other fees, and these can be high³. Different fees are likely to be charged when you enter into an equity release agreement¹², and they typically include a fee to have your property surveyed, an application fee, a legal fee and an advice fee¹⁵.

The application fee is payable 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 plan¹⁵. Borrowing the fee adds it to the balance that then rolls up, so a fee paid this way costs more over the life of the plan than the same fee paid in cash.

On advice, most equity release companies charge between £500 and £2,000 for advice⁵. One survey of adviser fees put the range at £700 to £1,900, with some advisers receiving commission from lenders instead of charging customers¹⁶. Before any advice is given, the adviser provides an Initial Disclosure Document summarising the details and costs, and a personal Key Facts Illustration¹⁷.

Early repayment charges and the limits on moving or downsizing

Equity release is designed to run for life, and leaving early is where it gets expensive. 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 amount⁴. Some equity release plans have penalties for early repayment, which can be costly if you decide to pay off the loan soon after taking it out¹⁸, and some providers charge for paying back the plan in full⁵.

The charge is not always a flat percentage. On some lifetime mortgages the early repayment charge is linked to gilt yields: if gilt yields rise between taking out the plan and repaying early, no early repayment charge is due, but if they have fallen, the provider imposes a charge relative to the fall in value¹⁹. That means the cost of getting out can depend on market conditions at the time, not just on how long you have held the plan.

This matters most in three situations: wanting to move house, wanting to downsize, and wanting to repay after a change in circumstances. Moving is often possible, because many plans allow the loan to transfer to a new property if the new home meets the provider's criteria, but the property has to qualify and the numbers have to work. Downsizing to a cheaper home can mean the released money has to be repaid from the sale proceeds, which is exactly when a charge can bite. The options are set out in what if I want to move house with equity release or home reversion? and can I repay equity release early?.

If a charge is applied unfairly, there is a route. The Financial Ombudsman Service can order redress that may include telling a business not to apply an early repayment charge, refunding the charge, or compensation for distress and inconvenience⁴. Complaints about equity release are handled by the ombudsman, and the service is free.

Where to get help: advice, illustrations and fraud risks

Advice on equity release is not optional in practice. Advisers who are members of the Equity Release Council will consider your personal circumstances, including an assessment of your income and expenses, and will explore alternatives to equity release²⁰. That last point is the one to test: a good adviser will tell you what else you could do, including a retirement interest-only mortgage, downsizing, or borrowing less. You have the choice of both telephone and face-to-face advice services¹⁷.

Before you commit, you need to ask for a personalised illustration, which will outline the features and risks that are relevant to your situation¹⁴. That document, not a brochure, is where the numbers for your own plan appear.

On fraud, the risk runs the other way from what most people assume. With equity release, it is not so much lenders as borrowers who may be at risk²¹. Be wary of anyone who approaches you unprompted about releasing money from your home, and check that anyone advising you is on the Financial Conduct Authority Register. The Equity Release Council itself is not authorised to offer advice or to arrange equity release or other types of mortgages²², so it can point you to information but cannot advise you.

Free, impartial help is available. The Equity Release Council provides help and information on equity release²³. StepChange and National Debtline give free debt advice, including on whether equity release is the right way to deal with debts, and Age UK and Independent Age publish free guidance for older homeowners⁶. If you are struggling with debt, talk to a free debt advice charity before signing anything: consolidating debts over a longer period may mean you pay more overall⁶.