Can You Get Equity Release on a Leasehold Property?

Wondering if you can get equity release on a leasehold property? You’ve come to the right place. We’re here to clear up your confusion about this process. More than 7,000 people each month look to us for guidance on topics like this.

In this article, we’ll explain:

• What equity release is.
• The difference between a leasehold and freehold property.
• How to get a realistic quote for equity release.
• Who can use equity release and what it’s used for.
• The criteria needed to get equity release on a leasehold property.

We know that understanding equity release can be tricky. But don’t worry. We’re experts in this field and are here to help. We understand your concerns, and we’ll make sure you have all the facts you need. Our goal is to help you make the best choice for your situation.

So, let’s dive in and discover more about equity release on leasehold properties.

What is equity release used for?

Equity release is used by seniors as a way to make their later years more enjoyable and to help fund retirement. It may be used as a pot of money to pay for general living costs, or it may be earmarked for specific purposes, such as holidays, home renovations, private healthcare or something else.

A small group of equity release users give all or some of their loan money to family, usually to help them get on the property ladder. It can be comforting to see your money put to good use by loved ones who need it today rather than waiting for their inheritance, despite the amount they receive being reduced. 

Who can use equity release?

Equity release is exclusively available to senior homeowners who are at least 55 years old. If you want to use equity release as a couple then both of you will need to be at least 55 years old. 

Generally, you must also be releasing equity from your main residence rather than a rental investment or holiday home. Although there may be a small number of equity release plans for non-main-residence properties.  

The property must meet a minimum valuation of around £75,000 and it must not have an outstanding residential mortgage or other debts attached. The lender will complete checks on the property to ensure it meets building regulations and is not at risk of flooding or significant depreciation. 

Equity release vs second charge mortgages

Note that equity release is not the same as second charge mortgages, which is an overarching term to refer to secured loans against your home equity, such as a home equity loan. 

Whereas equity release is exclusively for senior homeowners, a home equity loan is generally used by much younger people who want to add a second debt to their home separate from their residential mortgage. This is often done to help fund home improvements. 

Can you get equity release on a leasehold flat? (The quick answer!)

It is possible to take out an equity release plan on leasehold flats but it will depend on a few additional factors, not least the length of time remaining on your leasehold. 

To find out the specifics about leasehold properties and equity release, keep reading this guide! 

What are the different types of equity release?

There are two types of equity release available to applicable UK homeowners, namely home reversion schemes and lifetime mortgages. These should only be considered from companies that are authorised and regulated by the Financial Conduct Authority, and after consulting with an equity release adviser. 

1. Home reversion plan

A home reversion plan offers the senior homeowner access to up to 80% of their equity in a best-case situation. This is paid as a lump sum loan or as a drawdown facility accessible at any time. 

The loan includes no monthly repayments and no interest is applied. But the credit agreement will state that the homeowner must give the lender a greater percentage of the property’s future sale proceeds. 

For example, you might get a 20% equity loan but then have to give the lender 60% of the sale proceeds when the debt needs to be repaid (after moving into long-term care or after death). This means a £40,000 loan might have to be repaid with £120,000 from your property’s future sale value. 

2. Lifetime mortgage

A lifetime mortgage offers homeowners to get up to 60% of their property value as a lump sum or drawdown. It is the more popular choice but that doesn’t make it any less expensive over time. The money is charged with a fixed interest rate but neither the capital nor the interest is repaid each month. The interest rolls up to make the debt grow and is only repaid when the property is sold either after moving into care or after death.

For example, if you took out a £65,000 lifetime mortgage and moved into care 12 years later, your home would need to be sold to pay off the total debt, which would now owe close to £137,000 with a standard 6.4% interest rate. 

It should be known that there are variations of a lifetime mortgage, including an enhanced lifetime mortgage that can be used by people with poor health and shorter life expectancies to take out more equity, typically to fund private healthcare. 

What is the catch with equity release?

Equity release can sound like a lucrative deal from afar. You really can get a lump sum loan and not have to repay the debt at all until you move into care or die (through the sale of the property). But what isn’t obvious at first is the cost of equity release.

No matter what type of equity release product you use, the overall cost can be double or even triple the amount you borrow. This will eat away at the value of the estate you leave behind to loved ones, which is why equity release is a much easier decision for those with no children. 

We illustrate just how expensive these loans can be in the sections below. 

What is the difference between a freehold and leasehold property?

The difference between freehold properties and leasehold properties is important, especially if you are buying a flat or house in the UK. 

When someone owns a freehold property, they own the property and the land it has been built on. The most common examples of freehold properties are houses, but it is still possible for a detached house to not be a freehold property. 

Leasehold properties are when the homeowner owns the property itself but does not own the land that the property is built on. The most common example of leasehold properties is flats within large buildings. The flat is owned by the homeowner, but the land the flat is built on (i.e. the land that the flat building is built on) is not owned by the homeowner.

Can you use equity release on freehold properties?

You can release equity on a freehold property using a lifetime mortgage or home reversion plan. Freehold properties are the easiest type of property to release equity from, but if the property does not meet standards or specific lender criteria, your application can still be rejected. 

Can you release equity from a leasehold property?

It is possible to take out equity release on a leasehold property but the lender will consider additional factors before agreeing to the lifetime mortgage or home reversion plan. They will need to consider any service charges, ground rent, any sell-on clauses, and the most important of all – how many years you have left on the leasehold. 

How many years do I need on my leasehold to release equity?

The number of years required on a leasehold to get equity release will vary between lenders. On average, you will need at least 75 years left on the lease. Some lenders may ask for at least 90 to 125 years on the lease. 

On some occasions, you might still be offered a lifetime mortgage without the required number of years left on the leasehold. However, the deal you are offered may come with a reduced loan to value ratio (LTV) and/or a higher interest rate. 

What if my lease length is too short?

If your leasehold doesn’t have enough years to be eligible for equity release, you will need to extend the leasehold first. There will be valuation and legal costs to pay when you extend your leasehold. The good news is that new laws are coming into effect that will allow leasehold property owners to extend their lease by as much as 990 years without having to pay any ground rent. 

Can I use equity release to extend my lease?

If you cannot afford to pay for a leasehold extension but still want to get equity release on your leasehold property, there is a solution. It is possible to simultaneously apply for a leasehold extension and equity release with the equity release company paying the leasehold extension costs, which will be deducted from your loan amount once the leasehold is approved. 

The rest of the loan will not be paid out until the leasehold is accepted. It can take up to six months on average for the leasehold application to go through, meaning you will have to wait the same duration to access your loan. 

Can I get equity release if my flat has cladding?

Equity release lenders are more cautious than ever about giving lifetime mortgages on flats with cladding. Since the Grenfell disaster in London, cladding and combustible materials have been at the centre of attention on flat buildings. 

If the cladding is found to not meet (new) cladding and building regulations, it will significantly decrease the value of the property. You should aim to have your cladding certified as safe or resolved before applying for equity release. 

The UK Government has started offering funding support to homeowners who need to replace their cladding. 

Can I get equity release on a share of a freehold flat?

Equity release is available for joint owners of a property who take out equity release on 100% of the property together, such as a married couple, civil partners, or de facto partners who have a home together. This means owning 1-99% (as per shared ownership) of a property will not qualify for equity release alone. 

Interestingly, equity release can only be in a maximum of two names, so if a third person also owns the property or a third name has been added to the deeds – sometimes parents add their children to the deeds – then it will not be possible until one of the names is removed. 

Does equity release affect your state pension?

Your state pension payments are unaffected when you use an equity release plan. This is because the state pension is not a means-tested benefit. 

Means-tested benefits are benefits that take into account your wealth to decide whether you are eligible to receive them, or how much you should receive. Therefore, taking out a large loan through equity release could push your wealth above the thresholds to receive some benefits, including Universal Credit and Pension Credit payments (a top-up to your state pension). 

There may be ways around avoiding the thresholds, such as using drawdown equity release instead and only taking payments for money that will be spent quickly. It is best discussed with your equity release adviser.  

Is equity release taxed?

Equity release money is not subject to tax and will not have to be declared to HMRC. This is because the money received from credit agreements, such as loans and credit cards, are not taxed in the UK. 

However, releasing equity and giving the money to family and friends could have inheritance tax implications, which would be best discussed when you get financial advice.