Can I use equity release to help with long-term care costs?

Equity release is often considered a mechanism to fund retirement lifestyle improvements, but many UK homeowners explore it as a way to cover the escalating costs associated with long-term care. While equity release can provide significant funds, its interaction with the UK’s complex system of social care means testing requires careful consideration.

Can I Use Equity Release to Help with Long-Term Care Costs?

The short answer is yes, you can use the capital raised through equity release to pay for long-term care costs, whether that involves modifications to your current home to enable domiciliary care, or contributing towards residential care fees. However, this decision is rarely straightforward, as it carries significant implications for your eligibility for financial support from your local authority.

In the UK, social care funding is means-tested. If you self-fund your care for a period, you may eventually reach a point where your assets drop below the threshold (£23,250 in most parts of England, though this threshold can vary) and you become eligible for council assistance. Releasing equity accelerates the availability of cash but immediately raises your liquid assets, potentially keeping you in the self-funding bracket indefinitely.

Understanding Equity Release and Care Funding in the UK

Equity release allows homeowners, typically aged 55 or over, to unlock the value tied up in their property without needing to move house. The two main types are Lifetime Mortgages and Home Reversion Plans.

• Lifetime Mortgage: This is the most common form. It is a loan secured against your home. You retain full ownership, and the loan, plus the interest accrued (which is typically rolled up/compounded monthly), is repaid when the last borrower dies or moves into permanent long-term care.
• Home Reversion Plan: You sell a percentage (or all) of your home to a provider in return for a lump sum or regular payments, usually at less than the market value. You retain the right to live in the property rent-free for life, but the provider benefits from the eventual sale of the property.

When considering using these funds for care, the key issue is how the released capital is treated during the local authority financial assessment process.

The Local Authority Financial Assessment

Local authorities are responsible for assessing an individual’s care needs and determining how much they must contribute towards the cost of care. This involves a financial assessment (means test) which looks at income and capital.

The rules concerning capital are critical:

• Upper Capital Limit: In England (2024/25), if your capital exceeds £23,250, you are deemed a self-funder.
• Lower Capital Limit: If your capital is below £14,250, only your income is typically assessed, and the local authority will cover most of the costs.
• Capital between the Limits: If your capital falls between these two limits, you are expected to contribute £1 per week for every £250 of capital (or part thereof) above the lower limit.

The crucial factor here is the treatment of your home itself:

Generally, if you move into a residential care home, the value of your main residence is included in the capital assessment unless certain specified relatives still live there (e.g., a spouse, civil partner, or certain dependent relatives).

However, if you take out equity release, you are converting an asset that may be disregarded (the equity in the home itself) into liquid cash that is definitely assessable capital. This conversion could seriously jeopardise or delay your access to local authority support.

How Equity Release Impacts Means Testing for Care

The decision to release equity must be viewed through the lens of means testing, as the average cost of residential care in the UK can quickly exhaust the capital released.

Self-Funding Thresholds and Released Capital

If you release £100,000 via a Lifetime Mortgage, that £100,000 is now capital. Until that amount is spent down to the £23,250 threshold, you remain fully responsible for funding your care, regardless of how urgent your needs are.

Even if the equity release is specifically intended to fund care at home (domiciliary care), the capital remains assessable. While the local authority will assess property differently if you remain in your home, the cash received from equity release does not benefit from this same protection.

Furthermore, local authorities are specifically trained to look out for ‘deliberate deprivation of assets’. This occurs when a person purposefully reduces their capital (e.g., by giving away money) to qualify for state funding sooner. While taking out equity release to fund current, genuine care needs is unlikely to be classified as outright deprivation, advisors must ensure the motivation is clearly documented.

Using Equity Release for Domiciliary Care

For individuals who wish to remain in their own homes, equity release can be a viable way to pay for necessary home modifications (like stairlifts or accessible bathrooms) and fund private caregivers or nursing support. In this context, the home’s value is usually disregarded in the means test, and the equity release funds allow the individual to purchase a higher standard of care than they might receive otherwise.

This approach involves:

• Providing better quality care, often with more hours or specialist nurses.
• Allowing couples to remain living together when only one spouse requires care.
• Covering costs associated with enhanced living standards, such as private cooks or household management, that statutory funding would not cover.

Weighing the Benefits of Using Equity Release for Care

Despite the means-testing complications, there are legitimate reasons why someone might choose equity release to fund care:

1. Immediate Access to Quality Care: If care needs are urgent and a high standard is required, equity release provides immediate funds, bypassing the often long and restrictive processes of local authority assessment and provision.
2. Maintaining Independence: The funds can be used specifically to maintain independent living at home (domiciliary care), which is often the preferred option for both the individual needing care and their family.
3. Flexibility: Equity release products, particularly drawdown mortgages, offer flexibility. You can take an initial lump sum and then draw further amounts only as needed, helping to manage costs without accruing interest unnecessarily on the entire amount from day one.
4. Protecting Income: Unlike some other funding options, using capital from the property means that other sources of income, such as pensions, remain untouched and available for day-to-day living expenses or non-care related costs.

However, these benefits must be balanced against the significant financial implications of the debt itself.

Key Risks and Considerations

Equity release is a major financial commitment, and when used to fund care, the risks are compounded by the uncertainty of future care duration and costs.

Compound Interest and the Cost of Delay

The primary financial risk of a Lifetime Mortgage is compound interest. Because interest is typically rolled up and added to the principal loan amount monthly, the debt grows exponentially over time. If the individual lives for many years while receiving care, the debt could quickly double or triple the original amount borrowed.

If care is lengthy and the property is eventually sold to repay the debt, there may be little or no residual value left for the beneficiaries.

Depletion of Means Testing Eligibility

If you exhaust the released capital on private care and then subsequently apply for local authority funding, the council will look at your history. If the care needs are anticipated to last many years, self-funding up to the local authority threshold might prove to be a short-sighted move if statutory funding could have provided care sooner.

It is vital to obtain clear advice on how releasing capital compares to applying for local authority assessment immediately. You can find detailed, impartial information on social care funding rules on the government’s official website.

For specific guidance on current limits and rules regarding financial assessments, please consult Government advice on paying for care.

The ‘No Negative Equity Guarantee’

Almost all products approved by the Equity Release Council (ERC) come with a ‘No Negative Equity Guarantee’. This protection ensures that when your property is sold following your death or move into long-term care, you or your estate will never owe more than the property’s sale value, even if the debt exceeds that value.

However, this guarantee does not apply if you opt for a product that is not regulated or ERC-approved, or if terms (such as maintaining the property) are breached.

Alternatives to Equity Release for Funding Care

Before committing to releasing equity, UK financial experts strongly recommend exploring all available alternatives, especially those specifically designed for care funding.

Immediate Needs Annuities (Care Fees Plans)

An Immediate Needs Annuity (INA), or Care Fees Plan, is an insurance policy designed for people who require care now. You pay a large, one-off lump sum to an insurance company, and in return, the insurer provides a guaranteed, tax-free income stream directly to the registered care provider for the rest of your life.

• Benefit: It provides certainty. The income stream is guaranteed, regardless of how long the care is needed.
• Drawback: The initial lump sum is substantial, and if the individual dies shortly after purchasing the plan, the investment is lost (though some plans offer partial protection for the first few years).

Downsizing (The ‘Third Option’)

Selling the existing property and moving to a smaller, less expensive home (downsizing) frees up capital directly. This option avoids the compounding interest risk inherent in Lifetime Mortgages and provides clean cash to fund future care needs.

• Benefit: Frees up capital tax-free and allows the individual to move to accommodation better suited for care (e.g., bungalows).
• Drawback: Requires moving, which can be emotionally and physically challenging, particularly if mobility is already restricted.

Renting Out the Property

If only one person in a couple requires care, or if the individual plans to be away from the home temporarily, renting the property out can generate income to pay for care fees. This maintains ownership of the main asset.

Utilising Existing Investments

ISAs, pensions, or other savings accounts should typically be liquidated first, as they are liquid assets and are fully assessable under the means test anyway. Unlike the main residence, these assets offer no protection.

Seeking Specialist Financial and Legal Advice

Due to the complex interaction between equity release products, means testing regulations, inheritance planning, and tax implications, seeking specialist advice is mandatory before proceeding.

Equity release advice must be provided by a financial advisor qualified in this niche area (holding the relevant Financial Conduct Authority permissions). They should perform a comprehensive assessment, including:

• Analysing your full financial situation, including existing debt and liquid savings.
• Projecting how long the care funds are likely to last based on estimated care costs.
• Discussing the impact on means test eligibility and potential inheritance erosion.
• Exploring all alternatives, including INAs and downsizing.

Part of a responsible financial review may include assessing your overall financial background and credit profile to determine suitability for any complex financial product. 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)

If you are considering equity release, particularly when involving complex issues like care funding, ensure you engage advisors who are members of the Equity Release Council (ERC). ERC members adhere to a strict Code of Conduct designed to protect consumers, including mandating the No Negative Equity Guarantee.

People also asked

Does equity release affect my eligibility for state benefits other than care funding?

Yes. Because the funds released become assessable capital, having a large lump sum in your bank account could affect your eligibility for means-tested benefits such as Pension Credit, Universal Credit, and Council Tax reduction. You must declare the capital to the relevant authorities as soon as you receive it.

What happens to a Lifetime Mortgage if I move into residential care permanently?

A Lifetime Mortgage generally becomes repayable when the last borrower moves into permanent residential care or passes away. The property must then typically be sold (within a defined timeframe, usually 12 months) to clear the debt, including the accrued compound interest.

Can I take out equity release if my partner is already in a care home?

You can usually still take out equity release if you, as the homeowner, remain living in the property and meet the minimum age requirements. If your partner has moved into care, the property is usually disregarded from their financial assessment (means test) while you still live there, but any equity released by you remains your liquid asset and could impact your own financial assessment if you are also seeking benefits.

Is it possible to make voluntary payments on a Lifetime Mortgage to reduce the interest?

Many modern Lifetime Mortgages allow voluntary partial repayments (typically up to 10% of the initial loan amount annually) without incurring Early Repayment Charges (ERCs). Making these voluntary payments can significantly reduce the total accrued debt and preserve more equity, which is highly beneficial if you anticipate a long duration of care funding.

If I use equity release for care, can the local authority still try to recover costs?

The local authority determines costs based on your assets at the time of the financial assessment. If you have released equity, that cash is assessed first. If you spend down that capital and become eligible for council funding, the authority covers the costs from that point forward. They cannot typically ‘recover’ costs based on equity that you already borrowed against and spent, but the property itself will ultimately be sold to cover the equity release debt first.

Conclusion

Using equity release to fund long-term care is a complex financial decision that requires careful planning. While it provides an effective way to access funds for higher quality, private care (especially domiciliary care), it must be understood that doing so may disqualify the recipient from future state assistance and will significantly reduce the value of the estate due to the accumulation of compound interest.

The key takeaway is that equity release converts a protected, non-assessable asset (the main residence) into assessable capital. If you move into residential care, the consequences for means testing eligibility are profound. Always obtain advice from a specialist financial adviser who can model various scenarios (including the use of Immediate Needs Annuities or downsizing) and ensure the chosen route is suitable for your specific care requirements and financial goals. For those needing funds now, remember that while equity release provides immediate liquidity, failure to manage the debt effectively could erode generational wealth substantially.

Your property may be at risk if repayments are not made on any loan secured against it, including equity release products that require specific interest payments (though most Lifetime Mortgages allow interest to roll up).