What is equity release and can you use it to pay off debts? Licensed insolvency practitioners and business recovery specialists Chamberlain & Co explain the different types of equity release and how they can be used to settle debts.

What is equity release?

Equity release refers to a process where a property owner releases cash from their property in exchange for later repayment of that debt to the lender, most commonly through a loan that is repaid on the borrower's death. This type of arrangement is usually only available to borrowers over the age of 65. 

From time to time, it can be used as a catch all phrase to describe the process where a property owner takes new or increased lending over their property through a more traditional mortgage in exchange for a cash advance.

Both types of lending are made through a secured loan. 

Who is eligible for equity release?

The eligibility criteria for equity release will largely depend on the lender. However, for lifetime mortgages the lender will likely only lend to elderly people and will require enough equity to cover its proposed lending. 

Retirement Interest Only mortgages, which were introduced to the market in March 2018, are available to borrowers over the age of 65. 

Equity release in the context of a more general property remortgage would likely cap lending at around 85 per cent of the property’s value.

What equity release options are there?

Subject to eligibility, the following equity release options are available:

• Lifetime mortgage

This is a loan secured on a property to which compound interest is added to the capital through the duration of the loan. These loans are usually repaid when the property is sold, the borrower dies, or if the borrower moves out into a care home. 

The borrower remains the property’s owner and retains responsibility for its upkeep and maintenance. 

• Interest only mortgage

This is a loan where the capital is repaid on death and the borrower continues to make payments in respect of the interest only whilst they remain in residence at the property.

• Retirement Interest Only mortgage

Retirement Interest Only mortgages were introduced in March 2018. They are provided to borrowers over the age of 65 and are based upon the income of the borrower and the affordability of the mortgage.

Only interest repayments are made by the borrower and the mortgage runs over the period of the borrower’s life, as opposed to for a set term. The loan is repayable upon death, sale of the property, or when the borrower moves into long term care. 

• Home reversion plan

In a home reversion the borrowers sell all or part of their home to a third party, who becomes the owner of the property. 

In return the borrower is given either a fixed lump sum of cash, guaranteed monthly payments, or a combination of the two and has the right to remain in occupancy of the property for as long as they wish. 

• Home income plan/Lifetime mortgage

This is a lifetime mortgage where the capital is used to provide an income by purchasing an annuity (a series of payments which are made at regular intervals). 

The annuity is often provided by the lender, and this product is predominantly available from insurance companies. 

• UK equity release schemes

These schemes are generally available to borrowers over the age of 55 who are homeowners with enough equity in the property. 

The borrower can opt to release some of the equity they hold in their property via an equity release arrangement. This loan is usually provided by a specialist lender. 

Can you pay off debts using equity release?

A borrower may use some or all the lump sum they receive, together with any monthly payments to which they are entitled, as they see fit. Accordingly, they may use these monies to settle any debts they may have.

However, careful consideration and planning should be made before any such borrowing is undertaken, and any such repayments are made. While it is important to repay your debts, releasing your equity in your property, usually in your later years of life when you have limited ability to generate future income, may limit the money available to you to enable you to continue to meet your necessary living expenses.

Careful consideration should therefore be given to using one of the above products in this fashion and professional advice should be sought.

It may, for example, be better for the proposed borrower to compromise his/her debts either informally or through an individual voluntary arrangement (IVA) as opposed to an equity release. Alternatively, a combination of the two processes may be required to ensure that the borrower settles their liabilities whilst remaining able to meet their ongoing living expenses. 

If the borrowers’ debts are modest, it is likely an equity release by itself will be enough. 

About the author

This article was written by Chamberlain & Co, who are licensed insolvency practitioners and business recovery specialists committed to delivering high-quality service and value to clients in all industries.

See also

What is the difference between a secured loan and an unsecured loan?

Does bankruptcy affect a house you are renting?

What debts are included in an individual voluntary arrangements (IVA)?

How can personal insolvency be legally satisfied?

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Publication date

16 July 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.