Equity Release to Pay for Care: How It Works and the Risks

For many older people, most of their wealth is tied up in one place: their home. So when care is needed and the costs mount, it is natural to wonder whether that value could help pay for it, without having to sell up and move. Equity release is one way of doing that, and it comes up often in conversations about funding care.

It can be a genuinely useful option for some families, but it is also a significant, long-term financial decision with real risks, and it is not right for everyone. This guide explains, in plain terms, how equity release works, the particular things to weigh when using it for care, and the alternatives worth considering first. It is general information only, not financial advice, and, as we will stress, proper independent advice is an essential part of the process.

What is equity release?

Equity release is a way for older homeowners, usually aged 55 or over, to access some of the tax-free cash tied up in their property, while continuing to live in it. There are two main types.

A lifetime mortgage is by far the most common. It is a loan secured against your home. You keep ownership, and usually you make no monthly repayments. Instead, the interest is added to the loan each year, and the whole amount, the original loan plus the accumulated interest, is repaid when you die or move into long-term care, typically from the sale of the home.

A home reversion plan is less common. Here you sell all or part of your home to a provider, for less than its market value, in exchange for a cash sum, while keeping the right to live there. When the home is eventually sold, the provider takes their share of the proceeds.

In both cases, the central idea is the same: you unlock money from your home now, without moving, and it is repaid later from the value of the property.

The most important point for care

Here is the crucial thing to understand when equity release is being considered specifically to fund care.

A lifetime mortgage is usually repaid when the homeowner dies or moves into long-term care. That means equity release is generally suited to paying for care at home, and not to funding a move into a residential care home, because moving into a care home would typically trigger repayment of the loan, and the house would likely be sold anyway.

This is one reason equity release and live-in care can fit together more naturally: both are built around your loved one staying in their own home. Releasing equity to fund care at home lets someone stay where they want to be, while drawing on the value of the very home they are remaining in. If a move into residential care is likely in the near future, however, equity release is usually not the right tool.

The benefits

Used well, and for the right person, equity release can offer real advantages:

• it unlocks money from the home without having to sell and move
• the cash released is tax-free
• with a typical lifetime mortgage, there are no monthly repayments to find
• it can allow someone to stay in their own home while paying for care there
• plans meeting industry standards come with important safeguards (more on these below)

For an "asset rich, cash poor" older person who wants to stay at home, it can turn otherwise inaccessible property wealth into the means to fund good care.

The risks, which are significant

It is just as important to understand the risks clearly, because they are real and substantial.

Compound interest. With a lifetime mortgage where you make no repayments, the interest rolls up and compounds year after year. Over time, the debt can grow surprisingly quickly, and can end up considerably larger than the sum originally borrowed. The longer the plan runs, the more the interest mounts.

It reduces what you leave behind. Because the loan is repaid from the value of the home, equity release reduces, and can substantially erode, the inheritance you leave your family. This is why involving family in the decision is so important.

It can affect benefits and funding. Releasing a lump sum of cash can push someone's savings above the thresholds for means-tested benefits, such as Pension Credit or Council Tax Reduction, and can affect local authority help with care costs. Paradoxically, releasing equity could reduce support your loved one is currently entitled to, so this must be checked carefully.

Costs and charges. Equity release involves set-up costs, including arrangement, valuation, legal and advice fees, and early repayment charges can be significant if you later change your mind.

Home reversion means selling below value. With a home reversion plan, you receive considerably less than the market value of the share you sell, which can be poor value if you live for many years afterwards.

The safeguards worth knowing about

The market is now well regulated, which offers important protections. Equity release is regulated by the Financial Conduct Authority, and plans provided by members of the Equity Release Council come with safeguards including:

• a no negative equity guarantee, meaning you can never owe more than your home is worth, so the debt will not pass to your family
• the right to remain in your home for life, or until you move into long-term care
• mandatory independent legal advice, so a solicitor goes through the terms and risks with you before anything is signed

These protections make modern equity release far safer than it once was, but they do not remove the need to weigh it up very carefully.

Consider the alternatives first

Because equity release is such a significant, long-term step, it is worth thoroughly exploring the alternatives before deciding. A good adviser will insist on this. Alternatives and things to check include:

• Benefits and funding you may be entitled to, including Attendance Allowance, which is not means-tested, NHS Continuing Healthcare, and local authority support. Our guides to Attendance Allowance and your funding options are a good starting point
• Using existing savings or other assets first
• Downsizing, if a move is acceptable, which can free up cash without a lifetime borrowing product
• Other later-life borrowing, such as a retirement interest-only mortgage, which may sometimes work out cheaper
• Family support, where relatives are able and willing to help

Very often, checking entitlement to non-means-tested support like Attendance Allowance is a sensible first step, as it is money your loved one may simply not be claiming.

Get proper advice, always

This cannot be stressed enough. Equity release is a major financial decision, and taking independent, regulated advice is not optional, it is a required part of the process, and rightly so.

A qualified, FCA-regulated equity release adviser will assess whether it is suitable for your loved one's specific circumstances, compare it against the alternatives, and explain the full implications. A solicitor provides independent legal advice before anything is finalised. And it is wise to involve the family in the conversation too, particularly given the effect on inheritance. Please do not enter into equity release, or rule it out, without this proper, personalised advice.

Weigh it carefully

Equity release can be a genuinely helpful way to fund care at home for some families, turning property wealth into the means to stay in a much-loved home. For others, the risks and costs, or better alternatives, make it the wrong choice. The only way to know which applies to your loved one is to take proper independent advice and weigh it up carefully, with family involved.

At Edyn, we are not financial advisers, and we would never steer you one way or the other on something like this. But we are always happy to talk through the practical side of funding live-in care, and to help you understand the fuller picture, so you can make the right decision for your family.

Book a free care advice call, or give us a ring on 020 3970 9900.

This guide offers general information only and is not financial or legal advice. Edyn is not a financial adviser. Equity release is a significant decision that reduces the value of your estate and may affect your entitlement to means-tested benefits. Always seek independent, FCA-regulated financial advice and independent legal advice before making any decision. Product features, eligibility and interest rates vary and change over time.