Buying a New Home with Equity Release: How It Works

Many people think of equity release as a way to unlock cash from their current property to fund retirement or home improvements. But did you know you can also use it to purchase a new home?

Whether you want to downsize to something more manageable, move closer to family, or simply find a property that better suits your lifestyle, a Lifetime Mortgage could be the key to making your next move a reality.

However, it is a significant financial decision. While it can bridge the gap between your savings and the cost of a new home, interest will accrue on the loan amount and could affect your entitlement to means-tested benefits.

How does it work? 

Using equity release to buy a house works similarly to a standard mortgage but with key differences designed for later life.

Instead of taking out a loan against the home you already live in, you apply for a Lifetime Mortgage on the new property you intend to buy. The cash released from the plan, combined with the proceeds from selling your current home (and any other savings), covers the purchase price of the new property.

The Outcome

You own the new home. The loan, plus compound interest, is typically repaid when you pass away or move into long-term care. This means the amount you owe can grow quickly over time, reducing the equity left in your property.

This strategy is particularly useful for those who may be “asset rich” but have a lower pension income that restricts them from getting a traditional mortgage. It is always important to seek independent equity release advice, which will allow you to consider all possible alternatives.

Why Are Homeowners Doing This?

Recent data suggests a shift in how homeowners are utilizing property wealth. While clearing existing mortgages remains the dominant reason for taking out plans—surging to 63% of new cases in early 2025 according to Key Group analysis—many are also using these funds to facilitate a move.

Here are a few reasons why people choose this route:

1.) Manage Cash Flow: You typically don’t have to make monthly repayments (though you can if you choose to), which can free up your pension income for day-to-day living.

2.) Better Location: It may allow you to afford a property in a more desirable area that might otherwise be out of budget.

3.) Security: You have the right to live in your new home for the rest of your life, or until you move into long-term care, provided you abide by the terms and conditions of the plan. However, you must maintain the property to a reasonable standard to avoid breaching these terms.

Important Risks to Consider

Equity release is not right for everyone, and it is vital to understand the potential downsides before proceeding.

1.) Reduced Inheritance: The loan and accrued interest are repaid from the sale of your home. This will reduce the value of your estate and the amount you can leave to your loved ones.

2.) Compound Interest: If you do not make monthly interest payments, the interest is added to the loan. Over time, this means you are paying interest on the interest, causing the debt to increase more quickly.

3.) Means-Tested Benefits: Releasing cash could impact your eligibility for state benefits, such as Pension Credit or Council Tax Reduction.

4.) Early Repayment Charges: Lifetime Mortgages are designed to be long-term. If you decide to pay off the plan early, you may face substantial early repayment charges.