How Does Equity Release Work?

The basic mechanism

With a lifetime mortgage:

1. A lender advances you a lump sum (or a series of drawdowns) secured against your property
2. You retain full ownership and the right to live there for the rest of your life
3. No monthly repayments are required
4. Interest is charged on the loan and compounded — added to the balance each year
5. When you die or move permanently into long-term care, the property is sold
6. The sale proceeds repay the original loan plus all accumulated interest
7. Any money left over passes to your estate

The key distinction from a standard mortgage: there is no fixed end date, no monthly payment obligation, and the loan is repaid from the property sale rather than from income.

How does interest work on equity release?

Interest on a lifetime mortgage compounds annually. Each year, interest is calculated on the current loan balance and added to it. The next year, interest is charged on the new, higher balance. Over a long period, this causes the loan to grow substantially — and it is the single most important number to understand before proceeding.

Worked example — interest roll-up over time

Assumptions: £100,000 initial loan, 5% fixed interest rate, no repayments made.

Example only. Assumes fixed 5% rate, no repayments, annual compounding. Actual rates vary by lender and circumstances.

At 5%, a £100,000 lifetime mortgage roughly doubles in 15 years without any repayments. This is not necessarily a problem — if the property also rises in value over the same period, there may still be significant equity remaining — but it is the most important number to understand before proceeding.

See this for your own figures with our equity release calculator.

Lump sum vs drawdown — two ways to take the money

Lump sum lifetime mortgage

You receive the full agreed amount on completion. Interest begins compounding immediately on the entire balance. This suits situations where you need a large amount at once — for example, to clear an existing mortgage, fund a major home improvement, or make a large gift to family.

Drawdown lifetime mortgage

A drawdown plan sets up a total facility — say, £80,000 — but you only take what you need, when you need it. Interest only accrues on the amount actually drawn. Amounts held in the facility but not yet drawn typically accrue no interest.

This makes drawdown more cost-efficient if your needs are spread over time. Taking £20,000 now and drawing the remainder over five years means five years of interest on the smaller amount rather than the full £80,000. Drawdown also provides flexibility to access further funds for unexpected costs without applying for a new product.

See our guide to what is drawdown equity release?

The equity release process — step by step

Taking out equity release follows a structured process, typically taking 8–12 weeks from application to completion.

Step 1 — Check eligibility
You must be at least 55, own a UK property that is your main residence, and the property must meet the lender’s minimum value (typically £70,000–£100,000). Some property types (certain leasehold flats, non-standard construction) may not be accepted by all lenders.

Step 2 — Take independent financial advice
Taking advice from a qualified equity release adviser is mandatory for regulated products. The adviser assesses your circumstances, explains the alternatives, and recommends a product if equity release is appropriate. They must be qualified to advise on equity release specifically.

Step 3 — Application
Once you choose a product, the adviser submits an application to the lender. The lender reviews your property details, confirms the loan amount, and issues a formal offer.

Step 4 — Independent property valuation
The lender instructs a valuer to inspect and value the property. This is usually paid for by the applicant. The valuation confirms the loan-to-value ratio the lender will lend against.

Step 5 — Independent legal advice
A solicitor of your choosing (not the lender’s) must advise you on the terms and implications of the plan. This is a regulatory requirement — you cannot proceed without it. The solicitor also handles the conveyancing.

Step 6 — Completion
Once all parties are satisfied, the plan completes. Funds are transferred — typically to your solicitor, then to you. For a drawdown plan, the facility is set up and you can begin drawing.

See our guide to how long does equity release take?

What happens at the end?

Equity release ends when the last applicant either dies or moves permanently into long-term care. At that point:

• The property is marketed and sold by the estate (lenders must allow 12 months for this, per Equity Release Council standards)
• Sale proceeds repay the loan plus all accumulated interest
• Any surplus passes to the beneficiaries
• If the property sells for less than the outstanding loan, the no negative equity guarantee means the shortfall is absorbed by the lender — neither the borrower’s estate nor their beneficiaries owe the difference

See our guide to what happens to equity release when I die?

Can you make repayments?

Many people assume equity release always means zero control over the loan growth. This is not always the case.

Voluntary interest payments — Some products allow you to pay some or all of the monthly interest, stopping the loan from growing (or slowing its growth considerably). This keeps the balance lower and preserves more equity for the estate.

Partial capital repayments — Some lenders allow repayments of capital — typically up to 10–15% of the original loan per year without penalty — while the plan is live. Early repayment charges typically apply to larger or earlier repayments.

If preserving equity is a priority, choosing a product with voluntary payment options at the outset gives you flexibility. An adviser should present these options as part of any recommendation.

How does equity release affect inheritance?

The loan plus compounded interest is repaid from the property sale when the plan ends. This reduces the value of the estate available to beneficiaries. Some products offer an inheritance protection guarantee — an option to ring-fence a fixed percentage of the property’s value for the estate, in exchange for a lower maximum loan amount.

Full detail in our guide to equity release and inheritance.

How does equity release affect benefits?

Cash received from equity release is not income and is not subject to income tax. However, the lump sum increases your savings or assets, which can affect entitlement to means-tested benefits such as Pension Credit, Council Tax Reduction, and Universal Credit. The threshold at which most means-tested benefits stop is £16,000 in savings. Full detail in our guide to does equity release affect means-tested benefits?

Frequently asked questions

Does equity release affect my credit score?

Taking equity release is recorded on your credit file but is not typically a negative entry. The loan is secured against the property, and there are no required monthly payments to miss — so there is no default risk in the conventional sense.

Can both partners take equity release?

Yes. Joint lifetime mortgages are common and widely available. The plan continues until the last surviving applicant dies or moves into care. The younger partner’s age determines the maximum loan-to-value ratio.

What if I want to move house?

Most lifetime mortgages are portable. You can transfer the plan to a suitable new property, subject to lender approval and the new property meeting the lender’s criteria. See can I move house with equity release?

Can I pay back equity release early?

Yes, but early repayment charges usually apply. The ERC structure varies by product — some are fixed percentages, some reduce over time. See can I pay back equity release early?

Is equity release regulated?

Yes. It is regulated by the Financial Conduct Authority. Advisers must hold appropriate qualifications to recommend equity release. Equity Release Council member products carry additional consumer protections beyond the regulatory minimum. See is equity release regulated?

Related guides

• What is equity release?
• Types of equity release
• Equity release costs and fees
• What age can you get equity release?
• How long does equity release take?
• What is a lifetime mortgage?
• Are equity release interest rates fixed?
• Equity release for debt consolidation
• Equity release for home improvements
• Alternatives to equity release