Equity Release: Should You Cash In Your Home?

Equity release lets you unlock cash from your home without selling. But the interest compounds fast, the IHT picture is complicated, and it’s not the only option. Here’s what you actually need to know.

Millions of people own homes worth several hundred thousand pounds, sometimes more, and yet they’re worrying about whether they can afford to replace the boiler or help a grandchild with a deposit.

The wealth is real. It’s just completely illiquid, sitting in the bricks and mortar you happen to live in.

Equity is simply the difference between what your home is worth and any mortgage debt still outstanding on it. Equity release is the mechanism that’s supposed to unlock it, and in some circumstances, it genuinely does.

But it is also one of those financial products where the gap between what people think they’re signing up for and what they’re actually signing up for can be enormous. So let’s go through it properly.

What equity release actually is

When most people talk about equity release, they mean a lifetime mortgage. This is a loan secured against your property, available to homeowners aged 55 and over.

You borrow a lump sum, or draw down money in stages, and no repayments are required during your lifetime. Instead, the loan plus all the accumulated interest is repaid when you die or move into long-term care, usually through the sale of your home.

There’s also home reversion, where you sell a share of your property to a provider while continuing to live in it. But this is far less common, and a lifetime mortgage is what the vast majority of people who take this route are considering.

When does it make sense?

Equity release tends to make the most sense in specific situations, not as a general top-up to retirement income.

The strongest case is when you have meaningful equity in your home, limited other assets, and a genuine financial need that cannot be met another way.

Paying off an interest-bearing mortgage is actually the single most common reason people use equity release, and that does make logical sense: you swap a mortgage you’re paying monthly for a lifetime mortgage with no monthly payments, freeing up cash flow immediately.

The fact that interest is rolling up in the background doesn’t help your long-term estate value, but if you cannot manage the monthly payments on a pension income, that’s a real solution to a real problem.

The second strong case is helping family members who need money now. Many parents and grandparents would far rather see their children benefit from their wealth while they’re alive.

If your home is your primary asset, equity release can unlock a portion of it to fund a house deposit, school fees, or any other significant need. Provided you understand the seven-year clock on gifts for IHT purposes (more on that below), this can work well.

Funding home improvements is the second most common use, and again, there’s logic there if the improvement enhances both your quality of life and the value of the property.

Where I’d be more cautious is using equity release to fund lifestyle spending without a clear sense of how long you’ll need the money to last. The compounding problem gets very serious very quickly.

The compounding problem

A lifetime mortgage charges compound interest.

Unlike a standard mortgage, where you’re paying down the balance and the interest is calculated on a shrinking debt, a lifetime mortgage charges interest on an ever-growing balance.

Interest is added to what you owe, and then next year, interest is charged on that larger figure. And so on.

Current lifetime mortgage rates range from around 6.2% to over 9.5%, with most borrowers in the 6.5% to 7% range depending on age, property value, and product features. At 6.5%, a debt roughly doubles in eleven years.

To put that in concrete terms: borrow £100,000 at 6.5%, make no repayments, and after eleven years you owe around £200,000. After twenty-five years, that same £100,000 has grown to approximately £466,000.

That is not a worst case. That is the maths at a rate that is currently considered competitive.

There is one important protection built into all reputable equity release plans: the no negative equity guarantee.

This means that even if your debt has grown to a figure larger than your home sells for, your family never has to make up the difference. They can hand back the keys and walk away owing nothing.

That matters. But it is a floor, not a ceiling: it stops your family going into debt, but it does not stop the equity in your home being completely wiped out.

If you take a significant chunk of equity out early in retirement and live for another twenty-five years, it is entirely possible that there is very little, or nothing, left in the property to pass on.

Modern products do offer ways to slow this. Drawdown plans let you release money in stages, so interest only accumulates on what you’ve actually taken.

Many plans now allow voluntary repayments of up to 10% of the outstanding balance each year without penalties, which can significantly reduce the long-term cost.

And interest-only lifetime mortgages, where you pay the interest monthly, stop the balance from compounding at all. But that last option requires regular income to sustain, which is exactly what some retirees don’t have.

What about inheritance tax?

This is where equity release intersects with something that is very much in the news right now, because since the Autumn Budget 2024 announced that pensions will be brought into the IHT net from April 2027, a lot of people are rethinking their estate planning from scratch.

Here’s how the IHT picture works with equity release.

When you die, your estate includes the value of your home, minus any mortgage debt outstanding. So a lifetime mortgage reduces your estate’s taxable value by the amount owed to the lender.

If your estate is above the IHT thresholds (£325,000 nil rate band, which is the portion of your estate that’s automatically free from inheritance tax, plus up to £175,000 residence nil rate band, an additional allowance that applies when you leave your home to direct descendants such as children or grandchildren, so up to £500,000 per person and £1 million for a couple), this reduction can genuinely cut the IHT bill.

The catch is that the loan balance grows due to compound interest, often faster than your estate’s IHT liability would otherwise have been. So you can end up reducing your estate’s value by far more than you saved in tax.

There is, however, a more deliberate use of equity release in estate planning. If you release equity and then gift that money to family members, you reduce your estate’s value in two ways: the loan sits against the property, and the cash you’ve gifted leaves your estate too.

Provided you survive seven years after making a gift, it becomes entirely free of IHT. Financial planners have noted a significant uptick in interest in this approach since the pension IHT announcement.

Advisers are fairly clear that the IHT reduction can be real, but that equity release should not be your first port of call for estate planning.

It is expensive to borrow, and if the IHT bill you’re trying to reduce is modest, the cost of the interest could outweigh the saving.

It also doesn’t work for every estate: if the residence nil rate band already shields your property, or your estate comfortably sits below the thresholds, the calculation looks very different.

One further point: the cash you receive through equity release is not taxable income.

You won’t pay income tax on it. But if you invest it and it generates returns, those returns may be subject to capital gains tax or income tax depending on how they’re held.

What else should you consider?

Before going down the equity release route specifically, it’s worth being aware that there are alternatives that may suit your situation better.

A retirement interest-only mortgage (often called a RIO mortgage) is not equity release. It’s a conventional mortgage where you pay the interest monthly but never repay the loan itself during your lifetime.

The balance stays flat rather than compounding, which means the estate retains far more value. You need to be able to afford those monthly payments, which rules it out for some people, but it’s considerably cheaper in the long run if you can.

Downsizing is often dismissed emotionally but is worth serious consideration. Selling a larger home and buying something smaller releases equity without any debt or compounding interest attached to it.

The friction and cost of moving is real, but so is the cleanness of the outcome.
If you’re considering equity release for IHT purposes specifically, talking to an estate planning specialist before proceeding is essential.

The interaction between the seven-year gift rule, the thresholds, pension reform from April 2027, and the cost of the borrowing itself is genuinely complex.

And if you go ahead with equity release, make sure your provider is a member of the Equity Release Council.

All Council members must offer the no negative equity guarantee as a minimum standard, along with fixed interest rates and the right to remain in your home for life.

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This article is for information and education only. It does not constitute personal financial advice. Equity release is a complex product and may not be right for your circumstances. Always seek advice from a qualified, FCA-authorised adviser before taking any action.

Sources

• Equity release interest rate data: Retirement Solutions UK, May 2026; over50choices.co.uk, June 2026
• Average remortgage rates: Manor Mortgages Direct, April 2026; HomeOwners Alliance, June 2026
• Standard variable rate: HomeOwners Alliance, June 2026
• IHT thresholds 2026/27: Legal & General; WillSafe UK
• Equity Release Council, 2025 lending data (via Retirement Solutions UK)
• Compound interest modelling: PensionEstimate.uk; Pro Calculator UK
• IHT and equity release interaction: Saga Money; LV=; The Private Office