Understanding equity release jargon is crucial, especially considering that UK homeowners aged 55 and above collectively owned nearly £5 trillion in property wealth as of 2022.¹ 

As releasing equity remains a well-known way to access this wealth, being familiar with the terminology can make a significant difference in your decision-making process. 

This article will provide clear explanations for some of the most commonly used terms.

BankingTimes offers well-researched, accurate insights on all the terminology you need to know to help you on your retirement finance journey.

Here is your A-Z list.

Your Equity Release Dictionary

From financial advice to the No Negative Equity Guarantee, here are all the definitions you need to know.

A - E Terms

Advice Fee 

A fee charged for specialised financial advice, required when opting for an equity release plan.

Adviser

A qualified professional specialising in offering financial guidance, particularly in investments, pensions, and mortgages.

AER (Annual Equivalent Rate)

AER is a rate used to express the yearly rate of interest on savings or investments, taking into account the effects of compounding. 

By incorporating how often interest is added to the principal, AER provides a more accurate picture of potential earnings over a year.²

Affordability Checks

Financial assessments that lenders use to evaluate if you can afford loan payments, taking your income and expenses into account.

Annuity

An annuity is a financial product that provides a series of payments made at fixed intervals, typically for the rest of one's life. 

It is often used as a way to provide a steady income stream, particularly during retirement. 

The payments are usually funded by a lump sum or a series of contributions.

APR (Annual Percentage Rate)

APR represents the annual cost of borrowing money and includes not just the interest rate but also any fees and charges. 

It is expressed as a percentage and is designed to provide a comprehensive measure for comparing different credit and loan offers.

Arrangement Fees

An arrangement fee is a one-off charge levied by a lender for setting up a loan or mortgage. 

This fee may be paid upfront or added to the total loan amount, and it is designed to cover administrative costs. 

Bankruptcy

A legal condition where you are declared unable to repay debts.

It is usually initiated by the debtor or creditors and involves a court process to liquidate assets and distribute the proceeds to creditors.

Beneficiary

A beneficiary is an individual or entity designated to receive benefits or assets from a will, trust, insurance policy, or other legal contracts. 

Buy-To-Let Lifetime Mortgage

A buy-to-let lifetime mortgage is a specialised product designed for property owners who wish to release equity from a rental property.⁴ 

It typically does not require monthly payments and the interest’s rolled up and the loan is repaid when the property is sold, the owner passes away, or moves into long-term care.

Capital

Capital refers to financial assets - money, property, and equipment - used for creating goods or services, making investments, or running a business. 

Capital Gains Tax

Capital Gains Tax (CGT) is a tax levied on the profit made from selling or disposing of an asset that has increased in value.⁵

In the UK, this tax is applicable to assets like property, shares, and certain valuable possessions and varies depending on the asset type and the individual's income tax band.

Capped Interest Rates

Capped interest rates are set by the lender, and while the rate can fluctuate within a range, it can not exceed the predetermined cap.

This provides borrowers some protection against excessive rate increases.

Cash Reserve Facility

A cash reserve facility is a feature of some equity release plans that allows the borrower to set aside a portion of their available equity for future use. 

This reserved amount is not subject to interest charges until it is actually withdrawn. 

Collateral

Collateral can be real estate, vehicles, or other valuable assets pledged as security for a loan, which often allows the borrower to secure better loan terms.

If the borrower defaults on the loan payments, the lender has the right to seize the collateral to recover their loss. 

Completion Fee

A completion fee is a one-time charge paid to a lender when a loan or mortgage reaches the completion stage, effectively finalising the agreement. 

The fee covers administrative and processing costs, and depending on the lender's terms, it can either be paid upfront or added to the total loan amount.

Compound Interest

Compound interest is calculated on both the initial principal and the accumulated interest from previous periods, causing the amount to grow at an accelerating rate over time.

Consultation

An initial meeting with a financial advisor to discuss your options and needs.

Direct Provider

Direct providers are financial institutions or companies that offer financial products or services directly to consumers, without using intermediaries like brokers or advisors. 

This approach can result in lower fees or more straightforward terms, as there are no middlemen involved. 

Disbursements

Funds that are paid out, often related to costs or fees in a transaction.

Discretionary Income

The amount of income left after all necessary expenses, such as taxes and basic living costs, are paid.

Downsizing

Downsizing refers to the act of moving to a smaller home, usually to release equity, reduce costs, or better suit lifestyle changes like retirement. 

This can result in lower mortgage payments, utility bills, and maintenance expenses. 

Downsizing Protection

Downsizing protection is a feature in some equity release plans that allows homeowners to sell their property and move to a smaller home without incurring early repayment charges, subject to specific conditions and timeframes in which it can be activated.⁶ 

Drawdown

Drawdown refers to the withdrawal of funds from a larger sum that has been approved for borrowing, typically in an equity release or credit line arrangement. 

Drawdown allows for incremental withdrawals as needed, and interest is usually only charged on the amount actually withdrawn. 

Drawdown Lifetime Mortgage

A drawdown lifetime mortgage is a type of equity release product that allows homeowners to withdraw funds from their home's equity in smaller amounts over time, rather than as a single lump sum. 

Interest is generally only charged on the amount withdrawn, not on the entire available limit. 

Read On: Drawdown Lifetime Mortgages Explained

Drawdown Reserve

Drawdown reserve refers to the preapproved amount of money in a drawdown lifetime mortgage that can be accessed as needed. 

Early Repayment Charges

Early repayment charges (ERCs) are fees incurred for paying off a loan or mortgage before the agreed term ends.⁷ 

They are designed to compensate the lender for the interest they would otherwise lose due to early repayment, and can be a flat fee or a percentage of the remaining balance.

Early Repayment Charge Exemption

Specific conditions under which early repayment charges do not apply, such as moving to long-term care.

Enhanced Lifetime Mortgage

An enhanced lifetime mortgage is a type of equity release product that takes into account the borrower's health and lifestyle factors. 

Individuals with certain medical conditions or lifestyle habits may qualify for larger amounts or more favourable terms because a reduced life expectancy could impact the loan's overall cost to the lender.

Equity

In the context of property, equity is the difference between the current market value of the property and the amount owed on any mortgages or loans against it.

Equity increases as you reduce the debt and as the property's value appreciates.

Equity Release

Equity release is a financial arrangement that allows older homeowners to access the equity tied up in their home without having to sell or move house.

This can be done through various products like lifetime mortgages or home reversion plans and the funds can be received as a lump sum, regular payments, or a combination of both.

Read On: What Does Equity Release Mean?

Equity Release Calculator

An equity release calculator is an online tool used to estimate the amount of equity you could potentially release from your property.

Equity Release Council

The Equity Release Council is a UK-based trade body that represents providers, qualified advisors, intermediaries, and surveyors in the sector.

It sets standards and safeguards for consumers to ensure that products are safe, transparent, and fair. 

Estate

The sum of an individual's assets, including property and investments, usually considered in the context of inheritance.

F - K Terms

Financial Conduct Authority (FCA)

The Financial Conduct Authority is a regulatory body in the UK responsible for overseeing the conduct of financial firms to ensure consumer protection, market integrity, and competition.⁸ 

It has the authority to set guidelines, investigate misconduct, and enforce regulations for financial markets and companies. 

Failure to comply with FCA regulations can result in penalties or legal action.

Financial Conduct Register

The Financial Conduct Register is an online database which provides information about firms, individuals, and other entities that are regulated by the FCA.⁹ 

The register helps consumers verify the legitimacy of financial service providers and offers details about their permissions, history, and contact information.

Financial Ombudsman

An independent agency that resolves disputes between consumers and financial services companies.

If a consumer is unhappy with the resolution provided by a financial firm, they can escalate the complaint to the Financial Ombudsman.¹⁰

The decisions are legally binding, requiring the company to take action if found at fault.

Fixed Interest Rates

Interest rates that remain constant for a set period, making repayment amounts predictable.

Freehold

Freehold refers to a form of property ownership where the owner has complete control over the land and any buildings on it, without time limit.

Heirs

Heirs are individuals who are legally entitled to inherit assets and property from a deceased person, usually as specified in a will. 

Where there is no will, heirs are determined by statutory laws, often favouring spouses, children, and other close relatives. 

Home Reversion

Home reversion is a type of equity release scheme where a homeowner sells a portion or all of their property to a reversion company in exchange for a lump sum or regular payments. 

The homeowner can continue to live in the property rent free or at a reduced rent until they die or move into long-term care. 

At that point, the property is sold and proceeds are divided based on ownership percentages.

Read More: A Deep Dive Into Home Reversion Plans

Impaired Life

A condition where a person has a reduced life expectancy due to health issues.

Income

Money earned or received regularly, such as salary or pension.

Independent Advisor

A financial advisor not affiliated with any lending institutions, offering unbiased advice.

Individual Voluntary Arrangement (IVA)

An Individual Voluntary Arrangement (IVA) is a formal, legal agreement between a debtor and creditors, which allows the debtor to make manageable monthly payments.

At the end of the term, any remaining debt is typically written off. 

Inheritance Protection

Inheritance Protection is a feature in some equity release plans that allows the borrower to safeguard a portion of their home's value to pass on to heirs. 

While this arrangement reduces the amount of equity available, the borrower ensures that this amount will be left as an inheritance regardless of the total loan amount and accrued interest.

Inheritance Tax (IHT)

Inheritance Tax (IHT) is a tax levied on the estate if its total value exceeds a certain threshold, and is payable before the assets are distributed to heirs.¹¹

Initial Disclosure Document

A document outlining the service you can expect from a financial advisor, including any fees and limitations.

Interest

Interest is the cost of borrowing money, typically expressed as a percentage rate applied to the loan amount. 

It is also the return earned on an investment or deposit. 

In the context of loans and mortgages, interest is usually paid by the borrower, whereas for savings and investments, it is earned by the account holder.

Interest-Only Lifetime Mortgage

An interest-only lifetime mortgage is a type of equity release where the borrower receives a lump sum against the value of their home and makes regular payments to cover the interest, thereby preventing the loan amount from compounding over time.

The loan's principal amount remains unchanged and is usually repaid when the homeowner dies, sells the property, or moves into long-term care. 

Since all lifetime mortgages now come with voluntary repayments, this plan is no longer necessary.

Joint Equity Release Plan

A joint equity release plan is for 2 individuals, usually a married couple or partners, using their shared property as collateral. 

Typically, the surviving partner can continue to live in the home after the other passes away. 

The loan is generally repaid when the last surviving borrower dies, or moves into long-term care.

KFI (Key Facts Illustration)

A Key Facts Illustration (KFI) is a standardised document provided by lenders to outline the essential features, risks, and costs of a mortgage or equity release product. 

The KFI aims to help consumers compare different options more easily by presenting information in a uniform manner. 

It is a mandatory requirement under Financial Conduct Authority regulations.

L - P Terms

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.

Learn More: Top Lenders in the Equity Release Market

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.

Learn More: Best Lifetime Mortgage Companies

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 is 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 will not be left with a debt greater than the home's worth when it is sold to repay the loan. 

Learn More: Negative Equity

Offer Letter

An offer letter is 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 is 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 is 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 is tailored to the individual's specific needs and circumstances.

Common Questions

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.