What Are the Risks of Equity Release?
Equity release is a significant financial decision that comes with real risks. Understanding them clearly — not in small print, but upfront — is the most important step before considering whether it is appropriate for your circumstances.
The main risks are: compound interest growing the loan balance over time; reduced inheritance for your estate; potential benefits impact; early repayment charges if you want to exit; and house price risk affecting remaining equity.
Compound interest — the most significant risk
With a standard lifetime mortgage, no monthly repayments are required. Interest is added to the outstanding balance each month, and then itself earns interest — this is compound interest. Over a long period, it can dramatically increase the total owed.
At a rate of 6%, an £80,000 loan with no repayments grows to approximately £144,000 after 10 years and roughly £258,000 after 20 years. The total owed can more than double in 12–13 years. For someone who takes equity release at 55, the loan could compound for 25 years or more before repayment is triggered.
The compound interest risk is real but manageable: many plans allow voluntary partial repayments (up to 10% of the original loan per year) without an early repayment charge, which significantly limits the growth. Use the equity release calculator to model different scenarios.
Reduced inheritance
Because the loan — including compound interest — is repaid from the sale of the property, the amount passed to beneficiaries is reduced. In some cases, particularly where the loan has been running for many years at a relatively high interest rate, the entire property value may be consumed by the loan repayment, leaving nothing for the estate.
The no-negative-equity guarantee on ERC member products means the estate can never owe more than the property sells for, but the estate can be left with nothing if the loan has grown to match the property's value. Many families regard this as the primary concern.
Impact on means-tested benefits
If you receive means-tested benefits — such as Pension Credit, Housing Benefit, or Council Tax Reduction — equity release funds held as savings can affect your entitlement. The funds are treated as capital from the moment they are received until they are spent. Above the relevant capital threshold, benefit entitlements reduce. This risk is most significant if you receive benefits and take a large lump sum without a clear plan to use the funds promptly. See Does equity release affect means-tested benefits?
Early repayment charges
Lifetime mortgages are designed as long-term products. If your circumstances change and you want to repay the loan before death or care entry — perhaps because you receive an inheritance, want to downsize, or want to switch to a better product — you will typically face early repayment charges. These can be fixed percentages or linked to gilt yields and may be substantial. See Can I pay back equity release early?
House price risk and the no-negative-equity guarantee
If property values fall, the amount of equity remaining for the estate after the loan is repaid will be smaller. In an extreme scenario — a very large loan on a property that has fallen significantly in value — the loan might exceed the property's worth. The no-negative-equity guarantee on ERC member products absorbs this shortfall: the lender cannot claim from the estate beyond the sale proceeds. However, property value falls do reduce what beneficiaries receive. See What is a no-negative-equity guarantee?
Reviewed by Chris, CII-qualified equity release specialist · Last reviewed July 2026
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