58 Equity Release Jargon Terms Explained in [SEO_DATE_YR]

If you are looking to unlock some of the value tied up in your home, you will probably have discovered some equity release jargon whilst doing your research.

What Is Equity Release?

Let’s dive into a practical equity release example: Suppose you own a home valued at £300,000 with no outstanding mortgage.

By opting for an equity release product, you could potentially unlock a portion of your home’s value as a lump sum or as additional income.

This is particularly beneficial if you’re exploring ways to enhance your financial flexibility during retirement.

Equity release in England and across the UK is regulated, ensuring you receive fair advice and transparent terms.

This financial strategy, including equity release loans and equity mortgages, provides a pathway to securing funds based on your property’s value without the immediate need to sell it.

Do not allow a few confusing terms get in your way!

We have put together a handy list of terms frequently used in [SEO_DATE_YR] to help you make sense of the process.

Let us take a look.

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Your A-Z Dictionary

A-E Terms

Accrued Interest

Accrued interest refers to the amount of interest accumulated on a loan, bond or debt since the last interest payment.

Advice Fee

An advisor charges an advice fee to assess your financial situation and make recommendations on which plan is right for you, if any. 

Advisor

An advisor is someone who has a deep understanding of a particular subject and can offer their expertise during the decision-making process. 

Money matters, personal finances, and investing are all areas where a financial advisor can assist.

AER (Annual Equivalent Rate)

The annual equivalent rate (AER) is a term associated with savings accounts and is used to show how much your savings would grow over the course of a year.¹

The AER is also sometimes known as the annual effective rate.

Affordability Checks

Affordability checks are performed at the application stage to make sure you will be able to repay the mortgage or loan (and that you will be able to meet the monthly interest payments).

Since equity release does not involve mandatory interest payments and the total debt will not need to be repaid until you have passed away or moved into care, you will not need to undergo affordability checks when applying for this type of loan.

Annuity

An annuity is a retirement product that pays you a guaranteed amount of income over a set period (or for life).²

The income you will receive is a return on an investment made by the recipient.

APR (Annual Percentage Rate)

The APR, or annual percentage rate, is the borrower’s equivalent to the AER. This figure indicates the real annual cost of a loan or mortgage, which means it takes into account the interest plus any fees.³

Customers use the APR to compare different products, so lenders must provide this rate when advertising their offering.

Arrangement Fees

Arrangement Fees are, as the name may indicate, fees charged by a lender for arranging a loan or mortgage. These costs are usually referred to as an application fee.

You may choose to add the application fee to your loan, but remember that interest will accrue on it if you do.⁴

The good news is that many providers do not charge application fees on some of their plans.

Bankruptcy

Bankruptcy is a legal status applied to people or entities who are unable to pay their debts.  

It is a status that usually lasts up to a year, during which time debts are written off, and financial restrictions are imposed. 

Bankruptcy stays on your financial record for six years and can make it difficult to qualify for credit in the future.⁵

Beneficiary

A person who receives all or a portion of your estate after your death is known as a beneficiary.

Your beneficiaries will be named in your will, which will be read and acted upon by an impartial executor (chosen by you) once you are deceased.

Buy-To-Let Lifetime Mortgage

Lifetime mortgages have been available sporadically for equity release on buy-to-let properties since 2009.⁶

These lifetime mortgages are a way for landlords to release equity from rental properties.

Something to keep in mind:

Not all buy-to-let lifetime mortgages are regulated by the FCA.⁷

Capital

When it comes to mortgages, the word ‘capital’ refers to money borrowed against the value of your home.

You may encounter this word in the context of ‘capital repayments’, as one of the defining features of equity release loans is the fact that the capital portion of the loan is usually only repaid once the borrower dies or moves into care.

Keep in mind:

A recent Equity Release Council rule states that all lifetime mortgages entered into after 28 March 2022 must allow penalty-free partial repayments.⁸

Capital Gains Tax

Capital gains tax is paid on the profit made when an asset that is appreciated in value is sold. 

You are only taxed on the profit, not the total amount you receive.

Capped Interest Rates

A capped rate is a variable interest rate with a maximum limit on how high it can go when there is fluctuation.

A benchmark interest rate below the cap’s limit is used to calculate and adjust what is paid within the limits of the cap’s restrictions.⁹

Capped rates protect borrowers from the worst effects of interest rate surges.

Cash Reserve Facility

Cash reserve facilities are short-term investments that allow consumers to access their money quickly.

You will have access to a cash reserve if you opt for a drawdown plan. With this type of lifetime mortgage, you will only pay interest on the money you withdraw.

Collateral

Collateral is an asset that a lender will accept as security against a loan.

It is essentially a guarantee that even if the loan is not paid back in cash, there is a valuable asset that could cover the debt.

Depending on the purpose of the loan, collateral may be real estate or another type of valuable asset.

When releasing equity, your home serves as collateral (though, unlike with traditional mortgages, you will not risk repossession, as you will always have the right to live in your home until you pass away or enter long-term care).

Completion Fee

A completion fee (also known as an arrangement fee) is a fee charged by lenders for arranging credit.

While completion fees can be expected, some lenders waive this charge.

Compound Interest

The interest payable on a mortgage is calculated based on the capital amount and any interest already accrued.

This mechanism is known as compound interest, as you will owe interest on interest.

The compounding effect will make your debt grow at a greater rate than if you had elected to pay off the interest as it accrued.

What does this mean for me?

If you are taking out a lifetime mortgage, paying the interest as it accrues will protect you against the effect of compound interest.

However, this may not be a concern if leaving an inheritance is not a priority for you.

Consultation

A consultation is a meeting with a broker or advisor to discuss your financial situation and your future goals. 

The meeting will usually determine whether equity release is viable for your circumstances.

Consumer Price Index (CPI)

The Consumer Price Index (CPI)¹⁰ is a metric that measures the weighted average of prices for a certain collection of consumer goods and services.

The CPI is used to assess price rises associated with the cost of living.

Conventional Mortgage

A conventional mortgage is a home loan or mortgage that is not backed by government entities. 

Such a mortgage is typically offered by a private lender, such as a bank, credit union, or mortgage company.

Debt Management Plan

A debt management plan is an informal agreement between yourself and your creditors that allows you to pay off your outstanding debt in smaller amounts over a longer period of time.  

Deprivation of Assets

Deprivation of assets is when someone intentionally tries to reduce the value of their assets to qualify for a greater grant towards care fees.¹¹

Direct Provider

Getting financial advice is compulsory when considering equity release.

Some lenders employ in-house advisors. They do so, so you will not need to seek counsel from an independent adviser.

These are referred to as direct providers.

Disbursements

The act of paying cash out is known as a disbursement.

The term disbursement may be used to describe money paid into a firm’s operating budget, the transfer of a loan amount to a borrower, or the payment of a dividend to an owner.

Discretionary Income

Discretionary income, also known as disposable income, is the cash left over from your income after paying for life essentials, like taxes, bills, and living costs.

Downsizing

Downsizing is the act of selling your current property in exchange for a cheaper or smaller home.

This is the most common alternative.

Downsizing Protection

The Equity Release Council’s downsizing protection allows you to move and pay off your plan in full, if the new lender does not consider your property as suitable collateral.

Drawdown

A drawdown is a means of accessing your cash reserve to release smaller amounts of money at a time.

Drawdown Lifetime Mortgage

Drawdown lifetime mortgage plans are designed for the homeowner to open a cash reserve where their equity release income is stored.

The money is then available to be withdrawn, whenever the homeowner needs cash.

The minimum withdrawal amount is usually £2,000 and you will only pay interest on the money you withdraw.¹²

Drawdown Reserve

A drawdown reserve is a cash reserve for the balance of your loan following the release of a smaller initial lump sum. 

You do not have to pay any interest on the money that is kept in your reserve.

Early Repayment Charges

Equity release loans are intended to last throughout the course of your lifetime.

However, if you need to end your plan early, due to unforeseen circumstances, you may need to cover early repayment charges.

This can be up to 5%* of the total loan amount.

*The above is for indicative purposes.

Early Repayment Charge Exemption

Early repayment charge exemptions are applied in certain circumstances to waive the ERC fees.

An example of a significant life event exemption is when a surviving partner in a joint lifetime mortgage has the option to repay the loan following their partner’s death, without incurring early repayment fees.

Enhanced Lifetime Mortgage

An enhanced lifetime mortgage is a loan that is designed to give homeowners low interest rates and more equity, should they be suffering from lifestyle or chronic conditions.

You will need to fill out a lifestyle questionnaire to qualify for an enhanced lifetime mortgage.

Illnesses that qualify could include cancer, diabetes, heart conditions, or obesity.

Equity

Equity is the cash portion of your property, not taking into account any part that is mortgaged or still owned by the bank.

It is the value in your property that belongs to you and can be extracted either through a sale or with equity release.

Equity Release

What is equity release and how does it work?

Equity release is a UK-based product designed for older homeowners.

It allows them to extract the value of their property, while still living there.

There are 2 types: lifetime mortgages and home reversion plans.

Equity Release Calculator

An equity release calculator is a tool designed to help lenders and financial advisers determine the amount of equity that is available to unlock from your property, based on your age and property value.

Equity Release Council

The Equity Release Council (ERC) is an industry body that regulates the market.

They are responsible for ensuring members act with integrity and transparency towards their customers – the borrowers.

Estate

Your estate is an accumulation of all your assets at your death, once all your debts are settled.

If you opt for a plan, the value of your estate will be reduced.

F-J Terms

Financial Conduct Authority (FCA)

The Financial Conduct Authority is an independent body regulating financial services in the UK.

As part of their portfolio, they oversee the industry to ensure fair practice and the protection of consumers.

Financial Conduct Authority Register

The Financial Conduct Authority Register is a list of all legitimate financial service providers operating in the UK, detailing their regulatory permissions.

Financial Ombudsman Service

The Financial Ombudsman Service is a free service that resolves financial complaints for eligible complainants in a fair and impartial manner. 

You would normally contact the Financial Ombudsman Service if you are dissatisfied with the way in which the financial entity in question has dealt with your complaint.

Fixed Interest Rates

Upon a loan agreement, fixed interest rates are set for life.

This means that no matter the length of the loan period, your interest rate will never increase or decrease after the initial agreement is set in place.

To receive lower interest rates, you will need to switch to a new plan.

Fraud

Fraud refers to a criminal act where there is an unlawful acquisition of money.

Advisers are always on the lookout for those who take out loans for illegal reasons, including when it comes to equity release.

Freehold

With a freehold property, the resident is the owner of the land, home, and all surrounding areas like gardens or garages.

Your property must be freehold or leasehold to meet release equity criteria.

Further Advance

A further advance is when you borrow more money or release further equity from your provider.

Heirs

Your heirs are the beneficiaries that you name in your will to receive your assets when you pass away.

While heirs are traditionally your children, they can be friends, or other family members, as long as this is clearly stipulated in your last will and testament.

Home Reversion

A home reversion is a form of equity release where you sell all or a portion of your property below market value, in exchange for tax-free cash.

Furthermore, you can live in the property, rent-free, for the rest of your life.

Impaired Life

When a homeowner has made poor life choices or is suffering from a health condition, this is known as an impaired life.

Individuals with an impaired life will qualify for an enhanced lifetime mortgage.

Income

Income is a term used to describe the quantity of money an entity may make, save, or spend in a particular time period.

Independent Adviser

An independent adviser is a third party financial adviser that is not affiliated with any lender or institution.

Instead, they provide whole-market advice, looking at financial retirement opportunities across lenders and finding you the best deals.

Individual Voluntary Arrangement (IVA)

An individual voluntary arrangement is a formal, legally binding agreement between you and your creditors which requires you to repay your debts over an agreed period of time.

Such an agreement is usually put in place when you are unable to meet your initial financial obligations and require a bit of leniency to make the repayments more manageable.

Inheritance Protection

Inheritance protection is a feature offered by some lifetime mortgage lenders that allows you to set aside a portion of your estate as a guaranteed inheritance for your heirs.

No matter how much your loan amount grows, your lender can never access the protected equity.

Inheritance Tax (IHT)

If you inherit cash or property as a gift or inheritance, the acquired income may be subject to inheritance tax.

This levy was introduced in 1986¹³ as a replacement for capital transfer tax.

Initial Disclosure Document

An initial disclosure document is a document that all financial providers must supply to their consumers. 

This document, which was adopted by the FCA, lists information about the company, the products it offers, the fees involved, who regulates it, and how to complain.

Interest

The interest rate is the fee for borrowing money, generally expressed as an annual percentage rate (APR).

The amount of money a lender or financial institution receives for loaning out funds is known as interest.

With a lifetime mortgage, you will usually pay fixed, compound interest.

Interest-Only Lifetime Mortgage

An interest-only lifetime mortgage is a type of equity release designed for you to pay back the monthly interest, designed to stop the loan from compounding.

This will allow you to leave more inheritance to your heirs.

Joint Equity Release Plan

A joint plan is designed for couples living together, who both own the property in question.

Unlocking equity through a joint plan will enable both homeowners to remain in the home until death or a move to long-term care.

K-P Terms

KFI (Key Facts Illustration)

The KFI is a universal document the lender provides, breaking down the terms and conditions of your plan, so you have a detailed record of the process.

Leasehold

Leasehold is a form of property ownership where the owner has the right to occupy and use a property for a set period, often decades or centuries, as defined in a lease agreement. 

Lender

The financial institution or individual providing funds for a loan.

Lifetime Lease

A lifetime lease is an arrangement where an individual acquires the right to live in a property for the rest of their life, without owning the property itself. 

This is usually in exchange for a one-time payment and possibly ongoing fees, such as a home reversion plan.

Lifetime Mortgage

A lifetime mortgage is a type of equity release product that allows homeowners 55 or older to borrow money against the value of their home without having to make monthly repayments.

The loan and accrued interest are usually repaid when the homeowner dies, sells the property, or moves into long-term care.

Loan-To-Value (LTV)

Loan-to-value (LTV) is a ratio that compares the amount of a loan to the value of the asset it’s secured against, often expressed as a percentage.¹² 

LTV’s a key factor lenders consider when assessing risk and determining interest rates for loans and mortgages.

Long-Term Care

Long-term care refers to a range of services and support systems designed to meet the health or personal care needs of individuals over an extended period, usually due to ageing, illness, or disability. 

This can include residential care in a nursing home, home-based care, or assisted living facilities. 

Means Testing

Means testing is the evaluation of an individual’s financial resources to determine their eligibility for certain types of financial aid or benefits. 

This can include income, assets, and other financial indicators. 

Mortgage

A loan specifically for buying property, secured against the value of that property.

Mortgagee

The lender in a mortgage agreement.

Mortgagor

The borrower in a mortgage agreement.

Mortgage Term

The length of time you have to repay a mortgage, typically 15 to 30 years.

Multi-Tie Advisors

Financial advisors affiliated with several, but not all, financial providers, limiting their product options.

Negative Equity

Negative equity occurs when the value of an asset, such as a home, falls below the outstanding balance on the loan used to purchase that asset. 

No Negative Equity Guarantee

The No Negative Equity Guarantee is a feature typically offered by members of the Equity Release Council that ensures the amount owed will never exceed the value of the property. 

This means that heirs won’t be left with a debt greater than the home’s worth when it’s sold to repay the loan. 

Offer Letter

An offer letter’s a formal document provided by a lender outlining the terms and conditions of a loan or mortgage that has been approved, which usually has to be signed by the borrower to finalise the agreement. 

This includes information like the loan amount, interest rate, repayment schedule, and any fees or charges. 

Open Market Value

Open market value is the estimated amount that a property would sell for, assuming a willing buyer and a willing seller. 

This valuation takes into account factors like location, property condition, and current market trends.

Pension

A pension is a financial arrangement that provides income during retirement as a result of making contributions during an individual’s working years, either by the individual, their employer, or both, into a pension fund.

Upon reaching retirement age, the individual receives regular payments from the fund. 

The size and terms of these payments can vary based on the pension plan’s rules and the total contributions made.

Portability

Portability refers to the ability to transfer an existing equity release mortgage from one property to another when you move. 

The property being moved to usually has to meet the lender’s criteria, and there may be fees involved.

Principal

The original sum of money borrowed or invested, not including interest.

Q-W Terms

Qualifying Criteria

Qualifying criteria are the set of conditions – age, income level, credit score, and other financial or personal factors – that an individual must meet to be eligible for a specific financial product, service, or benefit. 

Failing to meet these criteria usually results in the application being denied or offered on less favourable terms.

Repayment Vehicle

A method used to repay a loan, such as monthly payments or an investment.

Roll-Up Interest

Roll-up interest refers to the interest accrued on a loan, typically an equity release product, that’s added to the original loan amount rather than being paid regularly. 

Over time, this results in the compounded growth of the loan amount.

Secured Loan

A secured loan is backed by an asset, such as property, which serves as collateral. 

If the borrower fails to make the required payments, the lender has the right to seize the collateral to recover the loan amount. 

Secured loans usually offer lower interest rates compared to unsecured loans because they present less risk to the lender.

State Pension

A state pension is a regular payment made by the government to eligible individuals who have reached 66 years of age, usually based on National Insurance contributions made during their working life.¹³ 

Term

The length of time a financial contract will be in effect, such as a loan or investment.

Tracker Mortgage

A type of mortgage where the interest rate’s tied to a benchmark rate, usually the Bank of England base rate.

Unsecured Loan

A loan without collateral, usually personal loans, credit cards, student loans, and some types of installment loans, generally resulting in higher interest rates.

Underwriting

The process used by insurers or lenders to evaluate the risk of insuring a client or issuing a loan.

Variable Interest Rates

A variable interest rate fluctuates over time based on market conditions or a predetermined index.

This means that monthly payments can also change, making it less predictable for the borrower but potentially offering lower initial rates.

Whole of Market Advisor

A whole of market advisor has access to all regulated equity release products and providers in the market when giving advice. 

This allows them to provide advice that’s tailored to the individual’s specific needs and circumstances.

Common Questions

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Conclusion

Knowledge of the terminology associated with releasing equity can make the process less daunting and help you make informed decisions. 

From lifetime mortgages to home reversion plans, knowing what each term means will give you better control over your financial future. 

This clarity can be invaluable, especially when discussing your options with financial advisors or loved ones. 

In summary, grasping equity release jargon can empower you to make choices that best suit your needs.