Equity release is a significant financial decision that allows homeowners, typically aged 55 or over, to unlock tax-free funds from the value of their property without having to move. When this decision is combined with a remortgage—either to switch standard providers or to incorporate the equity release into a new overall debt structure—the complexities and risks multiply considerably. While equity release can provide much-needed liquidity, understanding the long-term impact on your estate, future financial flexibility, and current debt obligations is crucial.

The main risks involve the immediate growth of the debt due to compounding interest (roll-up), which significantly reduces the value of the property left as inheritance. Combining equity release with a remortgage may also expose you to substantial early repayment charges (ERCs) and potentially disqualify you from means-tested state benefits.

The Risks of Equity Release When Remortgaging?

Equity release refers primarily to two products: Lifetime Mortgages and Home Reversion Schemes. Most UK customers opt for a Lifetime Mortgage, where you take out a loan secured against your home, and the interest typically ‘rolls up’ (compounds) until the home is sold, usually when the last borrower dies or moves into long-term care. Remortgaging, meanwhile, involves switching your existing standard residential mortgage to a new provider, often to secure a better interest rate or borrow additional funds.

Combining these two actions—remortgaging your property while either already having an equity release product or integrating equity release into the new borrowing structure—introduces specific layers of risk that must be carefully evaluated by professional, independent financial advisers.

The Core Financial Risk: Compounding Interest

The single most significant financial risk associated with equity release, particularly Lifetime Mortgages, is the effect of compounding interest, often referred to as “roll-up.”

How Compounding Interest Escalates Debt

Unlike a traditional repayment mortgage where you pay off capital and interest monthly, interest on a Lifetime Mortgage is usually added to the outstanding balance. This means that each year, the interest is calculated not just on the original amount borrowed, but also on all the interest that has accumulated in previous years.

• Exponential Growth: Over 15 to 20 years, a modest loan can double or triple in size, rapidly eroding the equity in your home.
• Example: If you borrow £50,000 at a fixed 5% interest rate, after 14 years, the total debt could exceed £100,000 if no repayments are made.
• No Repayments Required: While the absence of mandatory monthly payments provides financial flexibility, it is the mechanism that drives the debt growth.

Even if you remortgage to secure a lower rate on the equity release element, if the interest still rolls up, the balance will continue to grow, potentially much faster than the rate of property price inflation.

Risk to Inheritance and Estate Value

Since the primary purpose of equity release is to access home equity now, the consequence is a substantial reduction in the remaining value of the estate for beneficiaries later. This is often the hardest risk for families to accept.

• Reduced Value: The larger the compounded debt, the less is left for children or other heirs.
• Potential Zero Value: In rare cases, if the property value stagnates or falls significantly, or if the borrower lives for a very long time after taking out the release, the debt could theoretically consume nearly all the property’s value.

However, products approved by the Equity Release Council (ERC) typically include a No Negative Equity Guarantee (NNEG). This guarantee ensures that when the property is sold, even if the debt exceeds the sale price, your estate will never owe more than the property is worth. This protects your heirs from inheriting debt, but it does not protect them from a reduced inheritance.

Specific Risks of Combining Equity Release and Remortgaging

When you attempt to remortgage a property that already has (or will have) an equity release product attached, new complexities arise concerning suitability and cost.

1. Early Repayment Charges (ERCs)

Most mortgages and equity release products have fixed terms (often 5 to 15 years) during which time switching providers triggers significant ERCs. If you remortgage simply to switch your existing equity release provider, you could face penalties that wipe out any benefit gained from a new, lower interest rate.

• High Costs: ERCs on equity release products can be particularly complex and high, sometimes calculated based on long-term government bond yields rather than a fixed percentage.
• Long Duration: Some equity release products maintain high ERCs for periods as long as 10 or 15 years, severely restricting your future financial flexibility.

2. Eligibility and Affordability Constraints

Remortgaging often requires a new affordability assessment. If the combined loan includes a traditional capital-and-interest component alongside the equity release portion, lenders must be assured you can meet the monthly payments for the traditional component.

• Age Limits: Equity release is designed for older borrowers, but standard residential remortgaging may have strict upper age limits (sometimes ending at 75 or 85), which could restrict your provider choice.
• Credit History: Lenders will review your credit history before offering a new remortgage deal. Any defaults or missed payments in the past could lead to higher rates or rejection. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

3. Restricted Future Flexibility (Portability Risk)

If you take out a Lifetime Mortgage, you may decide later in life that you need to move house. While most ERC-approved plans are “portable” (meaning the debt can be transferred to a new property), this is not guaranteed.

• New Property Requirements: If the new property does not meet the lender’s criteria (e.g., location, type, or sufficient value relative to the debt), the loan may not be portable.
• Forced Repayment: If the loan is not portable, you would be forced to repay the entire equity release debt immediately, potentially incurring significant ERCs and financial stress.

Impact on Means-Tested Benefits

A crucial, often overlooked, risk is the impact on your eligibility for state support. Equity release funds are paid out tax-free, but they are considered capital.

If you receive a large lump sum of cash through equity release, that capital is held in savings or bank accounts. If the total amount of your savings exceeds the legal threshold for means-tested benefits (such as Pension Credit, Universal Credit, or Council Tax reduction), you could lose access to these vital payments.

• Immediate Loss: Even if you plan to spend the money quickly, the moment the cash hits your account, your eligibility may be assessed and revoked.
• Mitigation Strategy: Advisers often recommend a drawdown facility, where you only take out the funds you need immediately, keeping the remaining unused funds available within the equity release facility, rather than as accessible capital that affects benefits assessment.

Before proceeding, it is essential to check how equity release might affect any current or future state entitlements. The Government provides clear guidance on capital limits for benefits, and independent financial advice must take this into account.

Property Valuation and Maintenance Risks

The value of your property is fundamental to both the initial equity release assessment and the eventual repayment.

Valuation Discrepancies

Lenders will rely on their own independent valuation of your property. This valuation may be conservative and might be lower than your expectations or the price achieved in a quick sale. The lower the valuation, the less money you will be able to release.

Maintenance Obligations

Equity release providers require the homeowner to maintain the property in good condition. If you fail to maintain the property to an acceptable standard, the lender could take action, including requiring you to repay the loan early if the collateral (your home) is deteriorating severely.

The Risk of Financial Mismanagement

The money received from equity release is usually a large sum intended to meet specific needs—paying off debt, funding retirement, or making home improvements. If these funds are mismanaged or spent rapidly on non-essential items, you are left with increased debt but no assets to show for it.

• The debt balance continues to grow, and if the cash is gone, you have no recourse but to wait for the property sale to settle the debt.
• Using the funds irresponsibly severely undermines the purpose of taking on the compounded financial burden.

It is crucial to have a clear budget and financial plan for how every pound released will be used before signing the agreement.

Legal and Compliance Considerations

Equity release is a highly regulated sector. Compliance mandates that homeowners receive specialist legal advice independent of the provider and lender. This ensures you fully comprehend the terms and risks involved.

When dealing with any mortgage or secured loan product, the most severe risk relates to security.

Although Lifetime Mortgages usually only require repayment upon death or care entry, any integrated standard mortgage component requires monthly payments.

If your combined remortgage includes a mandatory repayment element (often the case if you are consolidating existing debt alongside the equity release), failure to make those repayments will have serious consequences.

Your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, increased interest rates, and the imposition of additional charges and fees.

For further impartial guidance on equity release, the UK Government-backed Money and Pensions Service provides comprehensive information through its MoneyHelper service. This should be a key resource in your initial research process.

For more information on whether equity release is right for you and detailed breakdowns of the risks involved, you can consult MoneyHelper (formerly Money Advice Service), which offers free, unbiased advice.

Mitigating the Risks

The risks inherent in equity release cannot be eliminated. They can be managed effectively through careful planning and professional guidance.

Seek Independent, Specialist Advice

It is legally required that you receive regulated advice before entering into an equity release agreement.

Ensure your adviser specialises in the sector and is authorised by the Financial Conduct Authority (FCA).

They should explore all alternatives, including downsizing, standard remortgaging, or retirement interest-only mortgages, before recommending equity release.

Choose an Equity Release Council Member

Always choose a provider who is a member of the Equity Release Council (ERC).

ERC membership ensures products meet minimum standards, including the aforementioned No Negative Equity Guarantee and the right to remain in your home for life or until you move into long-term care.

Make Partial Payments

If your financial circumstances allow, choose a product that permits voluntary partial repayments.

By paying off a small amount of the capital or even just the interest annually, you can significantly slow down the effect of compounding, preserving more of your home’s value for your heirs.

Ensure the Product Meets Future Needs

If you anticipate needing more funds later, ensure the product has a competitive drawdown facility.

If you anticipate moving, ensure the product is fully portable without excessive charges.

People also asked

Can I remortgage my home if I already have equity release?

You might remortgage the existing equity release debt to a new provider for a better rate, but you may face significant Early Repayment Charges (ERCs) from your current provider.

Any new remortgage requires the original equity release lender to agree to the new secured charge on the property.

Does equity release affect my state pension?

No, taking out equity release does not affect the State Pension, as the State Pension is not means-tested. However, the cash released is considered capital, and it may affect means-tested benefits like Pension Credit, Housing Benefit, or Council Tax Reduction if the lump sum pushes your savings above regulatory thresholds.

Is a Retirement Interest-Only (RIO) mortgage safer than equity release?

A Retirement Interest-Only (RIO) mortgage is often considered a safer alternative if you can afford the monthly interest payments, as the debt does not compound (roll-up). However, RIO mortgages require strict affordability checks and mandatory monthly payments, whereas Lifetime Mortgages (the most common form of equity release) usually allow voluntary or no payments.

How long does the equity release debt take to double?

The time it takes for the equity release debt to double depends heavily on the interest rate. At a hypothetical 7% interest rate, the debt would double in approximately 10 years, assuming the interest is fully compounded. Even at lower rates, the compounding effect means debt growth is faster than most borrowers anticipate.

Can equity release debt exceed the value of my property?

For products regulated by the Equity Release Council (ERC), the risk is generally mitigated by the No Negative Equity Guarantee (NNEG). This guarantee ensures that your beneficiaries will never be required to repay more than the final sale price of your property, even if the compounded debt is larger.

In summary, while equity release combined with remortgaging can solve immediate financial issues, the decision carries substantial long-term risks, primarily relating to debt compounding, reduction of inheritance, and loss of future financial flexibility. Careful and mandatory specialist advice is not just helpful—it is vital for navigating this complex financial territory.