Is equity release a mortgage or a loan?

Is equity release a loan? Only one type is: a lifetime mortgage is borrowing against your home, while a home reversion plan sells all or part of it.

So, is equity release a loan or a mortgage? It depends which of the two kinds you mean, and the word "loan" fits only one of them. This page covers how each works, what the no-negative-equity guarantee does and which FCA rules apply. If you would like a qualified, FCA-authorised equity release adviser to look at your own home and plans, this page's short form books you a free call-back.

Is equity release a loan or a mortgage?

For the most common kind, it is both: a lifetime mortgage is a mortgage, and what you receive is a loan secured on your home. MoneyHelper describes the lifetime mortgage option as taking out a mortgage loan secured on your property. You keep owning the home, and the amount owed grows with interest until the plan ends.

The FCA's Handbook glossary defines a lifetime mortgage by when the lender can ask for the money back: the lender "may or may not specify a mortgage term, but will not seek full repayment of the loan (including interest, if any, outstanding) until the occurrence of one or more of the specified life events". The Equity Release Council puts it in everyday terms: the estate pays back the loan and the rolled-up interest once the borrower has died or gone into long-term care.

You will see "equity release loan" used everywhere as shorthand. The FCA's rules for how firms describe their products are stricter: a firm must call a lifetime mortgage a "lifetime mortgage" and a home reversion plan a "home reversion plan", and no other expression. "Equity release" is the umbrella over those two. What equity release is and how it works covers the whole process, and the types of plan sets out the variations within a lifetime mortgage.

How a lifetime mortgage differs from the mortgage you may have now

The difference is in when and how it is repaid. Monthly repayments are not required, the Equity Release Council explains, though on some plans you can opt to make them instead of letting the interest roll up. The unpaid interest does not vanish. You keep ownership of the home while the interest is rolled up, or compounded, meaning it is added to the balance and then earns interest itself, which is why compound interest on a lifetime mortgage has a page of its own.

• Repayment: your estate repays the loan and the built-up interest, not your income. Where a couple took the plan, nothing is repaid while either of them still lives there; it falls due when the second has died or gone into care.
• Cost over time: MoneyHelper warns that starting younger means carrying the loan for more years, so more interest accumulates, and that lifetime mortgage rates may be higher than those on ordinary mortgages. Equity release rates covers how they are set.
• Testing: MoneyHelper notes that equity release, unlike a standard mortgage, comes without an affordability assessment. Equity release against a remortgage compares the two.

Borrowing more on a mortgage you already have, through additional borrowing, a further advance or an equity loan, is a different route again. How it compares depends on your lender's terms and your circumstances; an FCA-authorised adviser who phones when you request a call-back can set the two side by side for nothing. If you still owe on a mortgage and want to know what happens to it, equity release with an existing mortgage has the detail.

Is a home reversion plan a loan?

No. A home reversion plan is a sale, not a loan. The FCA's glossary definition starts with a purchase: a reversion provider purchases the whole of, or a share in, a qualifying interest in land held by the homeowner or by trustees, who then become the reversion occupier. Its other conditions are that the occupier or a related person is entitled to live in at least 40% of the land as a home and intends to, and that this right ends on a move into a care home, on death, or after a specified period of at least twenty years. MoneyHelper describes the provider buying your home, or a share of it, "usually below market value".

The Equity Release Council adds that the provider takes your age and health into account when it buys, and that you receive a tax-free cash lump sum or regular payments together with a lifetime lease that guarantees the right to stay rent-free for life. Because you have sold a share rather than borrowed, your remaining percentage does not move with house prices; only taking more cash out later changes it. When the plan ends the home is sold and the proceeds are shared according to the proportions each side still owns.

The plans are covered in what a home reversion plan is, in home reversion compared with a lifetime mortgage and in who offers them. Whether a sale or a loan fits your age, home and family better is a personal question. Selling a share and borrowing can be compared for your own home, free, by a qualified equity release adviser once you complete this page's short form.

What is the no-negative-equity guarantee on a lifetime mortgage?

It is a promise that, on certain conditions, the borrower or their estate will not have to repay more than the home fetches when it is sold, even if the loan has grown larger. It is listed among the Equity Release Council's core lifetime mortgage standards, which say: "The product must have a NNEG so that, provided the secured property is sold for the best price reasonably obtainable and the terms and conditions of the loan have been met, the borrower or estate will never owe more than the property is worth, after deduction of reasonable sales costs."

Read the conditions. The cap holds only if the sale achieves the best price that can reasonably be got and every term of the loan has been kept, and the value it is measured against is what remains once reasonable selling costs come off. It also comes from the Council, a voluntary trade body, which says only products meeting its standards provide the protections it outlines. So it is a standard that members' products follow, not a rule on every firm, and the Council's standards are set out in full on their own page.

The guarantee limits what can be owed, not what is lost. Interest keeps compounding, and MoneyHelper notes that "Over time, the loan and accumulating interest reduces the equity in your home", so whoever inherits receives only what is left after repayment. How equity release affects inheritance looks at that. Two further effects, flagged in the same guide, are easy to miss: the money can reduce what you receive in means-tested benefits, council tax reductions or local authority grants, and that agreements can be hard to change or can include early repayment charges, both covered in the equity release guide. Whether a plan you are considering carries the guarantee is worth asking before you sign; once you leave your number, an FCA-authorised adviser can look into it for any plan you are shown, without charge.

Which FCA rules apply to equity release?

Both kinds are regulated. Lifetime mortgages and home reversion plans both fall under the Financial Conduct Authority, the Equity Release Council confirms. The FCA's own consumer glossary agrees there are "2 equity release options; a lifetime mortgage or home reversion".

Two parts of the FCA Handbook matter most to a reader. The mortgage conduct rules (MCOB 3A.2.6R) fix the product names described above. And the chapter on equity release sales and advice (MCOB 8.2.2G) lists among its purposes that "customers for equity release transactions receive advice in all cases". The same guidance allows an execution-only sale, with no advice, only where the customer has turned down advice they were given, been warned what proceeding means and told the firm specifically that they want to go ahead, subject to some limited exceptions set out in MCOB 8.6A. How equity release is regulated and whether home reversion plans are regulated go further, and choosing an equity release adviser covers checking the register.

Alongside the regulator's rules sits the Council's standard on legal advice: every customer who takes out equity release needs independent legal advice. That means a solicitor of your own, covered in why you need a solicitor.

Scots law uses different machinery for the loan type. Under section 9(3) of the Conveyancing and Feudal Reform (Scotland) Act 1970, a right over land granted to secure a debt by way of heritable security is legally effective only when it is embodied in a standard security. So where the home is in Scotland, the lender's security for a lifetime mortgage is a standard security rather than a legal charge. A home reversion plan, being a sale, is not a security for a debt.

More questions about equity release and borrowing

What is an equity release loan?

It is everyday shorthand, most often for a lifetime mortgage. The regulated product names are "lifetime mortgage" and "home reversion plan", and only the first is a loan.

Is equity release a secured loan?

A lifetime mortgage is: MoneyHelper describes it as a mortgage loan secured on your property. A home reversion plan is not a loan at all, because you sell all or part of the home.

Do I have to make monthly payments on a lifetime mortgage?

Not as a condition of the loan. On plans that offer the option, you can choose to pay the interest each month so it does not roll up. Interest-only lifetime mortgages covers those plans, and repaying equity release early covers paying the loan down.

Is it a good idea to borrow against my home this way?

That turns on your age, health, income and what you want the money for. Whether equity release is a good idea sets out the pros and cons, and the alternatives to equity release covers other ways to raise money.

Next step: talk it through

The FCA's Handbook expects advice on equity release, and the Council's standards call for a solicitor of your own. To hear how a loan or a sale would work on your own home, put your number into the form here; the qualified equity release adviser who returns your call charges nothing for that conversation.

Sources: FCA Handbook glossary (lifetime mortgage; home reversion plan), MCOB 3A.2 and MCOB 8.2; FCA financial terms; Equity Release Council pages on equity release, home reversion and its standards; MoneyHelper's equity release guide; the 1970 Scottish conveyancing Act, section 9, on legislation.gov.uk. Age limits are covered separately in equity release age limits.