How to fund care: a 60-second decision tree
The single biggest mistake families make is treating "we need to pay for Mum's care" as one question. It is actually three: where care will be delivered, whether her health needs qualify for free NHS funding, and which assets are sensible to convert. Picking equity release before answering those three commits you to compounding interest on the most expensive route. The tree below is the same one regulated later-life advisers walk through with new clients.
- 1 Significant medical or nursing needs — confirmed by a GP or hospital→ Apply for NHS Continuing Healthcare first. If granted, the NHS pays 100% of care costs with no means test. Use Beacon CHC for free advocacy if the local ICB initially refuses. Do this before spending anything.
- 2 Permanent care-home move, capital below £23,250 excluding home→ Ask the council for a deferred payment agreement. They pay the fees; the debt sits against the home at 4.65% simple interest until you sell or die. Cheaper than equity release in nearly every case.
- 3 Permanent care home, healthy estate, fixed-life-expectancy view→ Sell the home and buy an immediate needs annuity. The premium locks in tax-free fees for life. Preserves more of the estate than letting interest compound for 5+ years.
- 4 Care at home, want to stay put, low income but high property value→ Equity release (drawdown lifetime mortgage) or a RIO mortgage is justifiable here. The home is not sold. The loan funds adaptations, carers, or a top-up to pension income. Still check Attendance Allowance and a Disabled Facilities Grant first.
- 5 Spouse or dependent relative still lives in the home→ Do nothing with the home. The Care Act 2014 disregards its value as long as a qualifying person lives there. Equity release would needlessly load it with debt the surviving spouse will eventually inherit.
Four routes side by side
The four mainstream routes to fund residential care are: keep the home and take an equity release loan; keep the home and take a council deferred payment agreement; sell the home and invest or annuitise the proceeds; or sell the home and self-fund directly. Below is the same £100,000 of net care fees funded each way, over five and ten years, so you can see what the different routes actually cost the estate.
| Feature | Equity release | Deferred payment | Sell & self-fund | Immediate needs annuity |
|---|---|---|---|---|
| Interest rate | ~6.55% compound | 4.65% simple (Jan 2026 cap) | None | N/A — one-off premium |
| Cost on £100k fees over 5 yrs | ~£37,400 interest | ~£14,000 interest | £0 interest | Premium ~£30k, fees covered for life |
| Cost on £100k fees over 10 yrs | ~£88,800 interest | ~£25,600 interest | £0 interest | Premium ~£30k (still covers life) |
| Who owns the home? | You — lender has a charge | You — council has a charge | The buyer | The buyer (sale funds the premium) |
| Who inherits the home? | Estate — minus the loan | Estate — minus the deferred fees | Estate inherits the cash residue | Estate inherits the sale residue |
| Means-test effect | Lump sum may push you above £23,250 capital — losing council top-up | Neutral — the home stays disregarded | Sale proceeds count as capital immediately | Annuity income paid to provider does not count as capital |
| Tax treatment of income | Loan, not income — tax-free | Loan, not income — tax-free | Sale proceeds tax-free; investment returns taxable | Tax-free under s.725 ITTOIA 2005 (paid direct to provider) |
| Risk if you live longer than expected | Compounding interest eats the equity | Simple interest, manageable | Capital eventually runs out | None — insurer keeps paying |
| Best for | Care at home; spouse staying in home | Care home, want to keep home, short to medium stay | Long stay, no attachment to property | Long or uncertain stays, want certainty |
Interest cost estimates use a 6.55% compound lifetime mortgage rate (ER Council Spring 2026 average new fixed AER) and 4.65% simple DPA rate (DHSC maximum from 1 January 2026). Immediate needs annuity premium illustrative for an 85-year-old in moderate health using Just Group / L&G May 2026 pricing. Real figures depend on rates, health, and capital structure. Get personalised quotes.
Care funding calculator — see your numbers
Plug in the weekly care home cost, how long you expect to need care, the home's value, and any pension income that will go towards fees. The calculator shows what each of the four routes would cost over the period. The numbers update live.
England avg: £1,320 residential / £1,560 nursing
Avg residential stay ~2.5 yrs; nursing ~1.5 yrs (carehome.co.uk 2025)
Used for context — does not change cost per route
State Pension + private pension less Personal Expenses Allowance (£32.65/wk)
Approximate, before fees. Equity release figure assumes a single front-loaded loan; in practice a drawdown plan with phased borrowing reduces the interest cost. DPA figure uses the DHSC maximum rate — your council may charge less. Immediate needs annuity premium uses an illustrative £3.30-of-fees-per-£1-of-premium multiplier (Just Group / L&G May 2026 best-buy pricing, 85-year-old in moderate health). Get personalised quotes before deciding anything.
The 2026/27 care home means test, plain English
The means test is where most of the strategic decisions get made — and where most families get it wrong, because the thresholds have been frozen for so long that they no longer match real-world property and pension wealth. In England, the upper threshold of £23,250 and lower threshold of £14,250 have not moved in cash terms since the 2010/11 financial year. The two devolved nations diverge significantly.
| Nation | Upper limit | Lower limit | Notes |
|---|---|---|---|
| England | £23,250 | £14,250 | Frozen since 2010/11. Tariff income £1/wk per £250 between |
| Wales | £50,000 | £50,000 | Single threshold; weekly cap of £100 on contributions for home care |
| Scotland | £35,000 | £21,500 | Free personal care (£268.55/wk) and nursing care (£120.81/wk) on top, 2026/27 |
| Northern Ireland | £23,250 | £14,250 | Aligned to England; trust commissions care via local HSCT |
Source: DHSC Care and Support Statutory Guidance (England); Welsh Government social services regulations; Scottish Government free personal & nursing care rates 2026/27; nidirect.gov.uk for Northern Ireland.
Equity release pays a lump sum directly to you. If your other capital is already low (say £10,000 in savings), a £60,000 equity release lump sum pushes you straight from council-supported to full self-funder territory. You lose the council top-up on your care fees and have to spend the lump sum down toward £14,250 before help resumes.
Couples take note: capital is assessed individually for whichever spouse is in care, but the home stays disregarded as long as the other spouse lives there. Equity release on the home turns disregarded property wealth into assessable cash. This is the single most damaging unintended consequence of using equity release to fund a care-home placement — and a reason DPA almost always wins.
For full detail on the means test, including the 12-week property disregard, third-party top-ups and tariff income, see our companion guide on paying for care home fees in the UK.
Where equity release does earn its place: care at home
There is one genuine use case for equity release in funding care, and that is keeping someone in their own home longer than their pension income alone would allow. The economics look very different from a care-home placement because (a) the loan does not trigger early repayment as long as the property is still your main residence; (b) the borrowing can be a drawdown lifetime mortgage with small, regular releases rather than one large lump sum, dramatically reducing compound roll-up; and (c) you typically need to fund far less than the £68,000+ per year a residential home costs.
Average self-funded care at home runs at roughly £25 per hour through a regulated agency (LaingBuisson 2025). Four hours a day of help is around £36,500 a year — significant but nothing like a care home. With Attendance Allowance and pension income covering part of that, a small drawdown lifetime mortgage at £10,000–£20,000 a year topping up the gap can keep someone at home for five-plus years before total borrowing reaches £100,000. With voluntary interest payments (every plan from Equity Release Council members now allows up to 10% of the loan paid back per year without penalty), the compound element can be largely neutralised.
A drawdown lifetime mortgage gives you an agreed maximum facility, but you only draw — and only pay interest on — what you actually use. Borrowing £10,000 a year for five years costs much less in compound interest than borrowing £50,000 on day one and letting it roll up for five years. For phased care funding this is the structurally right shape.
Voluntary partial repayments (allowed up to 10% of the loan a year on Equity Release Council-standard plans since March 2022) can prevent the loan growing at all in years when income permits. If your DC pension or ISA throws off enough cash, paying the annual interest keeps the balance flat — turning the plan into something much closer to a RIO mortgage.
Three real-world scenarios
Different starting situations point to different right answers. The three composite cases below cover the most common decision points families face — and show why one tool fits one case and badly damages another.
Situation: Roger needs around 3 hours of help a day at home. The couple have no significant savings outside the State Pension and a small annuity. They are determined Roger should not go into a care home while Diane can manage.
The right tool here is equity release — specifically, a drawdown lifetime mortgage. A small annual release of around £15,000 funds the carer (about £80 a day, 5 days a week) and a stair-lift fitted under a Disabled Facilities Grant. Roger stays at home, Diane continues to be the primary carer, and the loan sits at £75,000 after five years — well below the home's value.
Why not a DPA? Deferred payment agreements are only available for people moving into a care home. They are not a home-care funding tool. The Care Act 2014 regulations are explicit on this.
Why not sell? Diane would have nowhere to live. The home is also disregarded in any future means test as long as she occupies it, so liquidating it would throw away that protection.
Situation: Alice has lived alone since her husband died in 2023. After a fall she needs full-time residential care, fees £1,320 a week. Her three children are split: one wants to sell, two want to keep the family home in case it can be inherited.
The right tool here is a deferred payment agreement. Net fees after Alice's pension contribution are roughly £54,640 a year. Over an expected 3-year stay that is £164,000 of deferred fees, accruing simple interest at 4.65% — about £15,200 over the period. The council pays the home directly; Alice's estate eventually settles when the property is sold after death.
Why not equity release? Two reasons. First, almost all lifetime mortgages would be triggered for early repayment because Alice no longer occupies the property as her main residence — most ER lenders give 12 months' grace and then require the loan to be cleared. Second, even if a non-standard product allowed it, the 6.55% compound rate would generate around £35,000–£45,000 of interest over the same period — more than double the DPA cost.
Why not an immediate needs annuity yet? Alice has a high life expectancy uncertainty (a fall recovery; no dominant terminal condition). Locking in a premium of around £160,000 now could be wasted if she sadly only lives 18 months. DPA preserves optionality — the family can convert to an annuity later if her health stabilises and a longer stay looks likely.
Situation: William's family sold his bungalow in February 2026 after he moved into a nursing home, fees £1,560 a week. His sons want certainty — they do not want to be managing investments through his last years.
The right tool here is an immediate needs annuity. Net fees after William's pension are about £67,000 a year. At his age and health, Just Group quotes a premium of around £190,000 to cover the gap tax-free for life, paid direct to the nursing home. The annuity is medically underwritten — advanced dementia and frailty at 91 generate a sharply enhanced rate.
Of the £540,000 sale proceeds, £190,000 funds the annuity, leaving £350,000 in the estate. The annuity income is tax-free under s.725 ITTOIA 2005 because it pays the provider directly. If William lives another 5 years instead of the assumed 2, the annuity keeps paying — the family bear no longevity risk.
Why not just spend down the £540k? The risk is the other way round: if William lives 6+ years, fees would erode close to £400,000 of capital, with anxiety about running out. The annuity converts an uncertain liability into a fixed one.
Always check NHS Continuing Healthcare first
NHS Continuing Healthcare (CHC) covers the entire cost of care for adults whose primary need is health-related rather than social. There is no means test, no upper or lower threshold, and no charge to the person being cared for. Funding follows the patient — it works in a care home, a nursing home, or in your own home.
The criteria are set out in the National Framework for NHS Continuing Healthcare (NHS England, revised 2022). Eligibility is decided by a multidisciplinary team using the Decision Support Tool, which scores 12 care domains including mobility, cognition, behaviour, drug therapies, breathing, nutrition and continence. Conditions commonly supporting eligibility include advanced dementia, Parkinson's with complications, motor neurone disease, late-stage cancer, stroke with significant disability, and complex medication regimes.
Age UK estimates only around 6% of older adults in care receive CHC despite far more being eligible on the criteria as written. Initial refusals are common and challengeable. Use Beacon CHC or Compass CHC for free advocacy before paying for anything else.
Deferred payment agreements in detail
The Care and Support (Deferred Payment) Regulations 2014 require every English local authority to offer a DPA to residents who meet three tests: (1) they are in, or about to move into, residential or nursing care; (2) they own a home included in the means test (i.e. no spouse or other qualifying relative living in it); and (3) they have capital below £23,250 excluding the value of the home.
Interest is set at a maximum of the national average gilt yield + 0.15%, recalculated twice a year by DHSC. From 1 January 2026 the cap is 4.65%. Crucially this is simple interest, not compound — so the debt grows linearly, not exponentially. Councils can charge less than the cap; some charge nothing for the first 12 weeks.
Set-up fees are typically £150–£800 (one-off); the council can charge for the legal work of placing the charge on the property. The agreement ends when you sell the property, die, or terminate by repaying the balance. Most families settle the debt from the sale of the home after death.
Wales operates an equivalent scheme under the Social Services and Well-being (Wales) Act 2014. Scotland's National Care Service legislation (in transition for 2026) includes a similar guarantee. Northern Ireland's HSC Trusts can offer deferred payment by discretion rather than by statutory right, which is why uptake is lower there.
From the official DHSC guidance to councils (updated for 2026):
"Local authorities must offer a deferred payment agreement where the adult meets the eligibility criteria… A deferred payment agreement enables a person to use the value of their home to fund their care costs by deferring the payment of those costs until a later date. The local authority will, in effect, lend the person the money to pay for their care."
"The maximum interest rate that local authorities may charge is set by the Secretary of State and is based on the cost of government borrowing as measured by the 15-year average gilt yield, plus a maximum default component of 0.15%. The rate is updated every six months."
The 20-year cost difference, plotted
The single most powerful argument against using equity release for care-home fees is the 20-year cost projection. Imagine someone needs to fund £50,000 a year of net care fees for the next four years, and we look ten years later because the home is still in the family (an unmarried surviving sibling lives in it). Equity release at 6.55% compounds the £200k opening loan into ~£378,000 over ten years. A DPA at 4.65% simple interest accrues to ~£253,000. Selling and self-funding leaves £200,000 spent — and the home gone. An immediate needs annuity needs about £152,000 of premium to cover the fees for life and the rest of the sale proceeds (potentially £150,000+) remains in the estate.
Notice which two routes preserve the home for the surviving sibling, and which one generates the lowest total cost while doing so. Equity release does the worst of both: it keeps the home loaded with debt that doubles roughly every 11 years at 6.55%.
Cross-link: paying for care home fees
For deeper detail on the means test, attendance allowance, third-party top-ups and the full council assessment process, read our companion guide on paying for care home fees in the UK. For a wider view of how equity release works generally — the no-negative-equity guarantee, drawdown vs lump-sum plans, the FCA advice requirement — see equity release explained. For non-equity-release ways of unlocking property wealth, see equity release alternatives.
Frequently asked questions
- Can I use equity release to pay for care?
- Yes — but only really for care in your own home. Almost every lifetime mortgage contract requires the loan to be repaid once you move permanently into a care home, because the property is no longer your main residence. The Equity Release Council product standards confirm this trigger event. So equity release is potentially a tool for funding domiciliary care, adaptations, a live-in carer or "topping up" pension income while you stay put — not a tool for funding a care-home placement. For a permanent care-home move, a council deferred payment agreement, an immediate needs annuity bought from the sale proceeds, or NHS Continuing Healthcare (if eligible) will almost always be cheaper.
- Is equity release cheaper than selling the house to pay for care?
- Almost never on a pure cost basis. At a 2026 lifetime mortgage rate of around 6.55%, a £100,000 loan doubles in roughly 11 years. Selling the home releases the same cash with no interest. The reason people pick equity release is non-financial: keeping the home for a returning spouse, preserving a sense of family base, or avoiding the upheaval of a sale. If those reasons matter to you, equity release for care at home can be justified. If they do not, you are paying compound interest for no benefit. Run the numbers on the calculator on this page before committing.
- What is a deferred payment agreement?
- A deferred payment agreement (DPA) is a legal arrangement with your local authority under the Care Act 2014. The council pays your care-home fees on your behalf; the debt is secured against your home and repaid (with interest) when the home is eventually sold — usually after death or when you decide to sell. The maximum interest rate is set nationally by DHSC at the national average gilt yield plus 0.15% — currently 4.65% from January 2026. Crucially this is simple interest, not compound. Every council in England must offer a DPA to anyone who meets the eligibility criteria (capital below £23,250 excluding the home, the home counted in the means test, and the person living in a care home). It is the single most under-used alternative to selling and to equity release.
- How does the care home means test work in 2026/27?
- In England, capital over £23,250 means you pay the full cost of care. Between £14,250 and £23,250 you pay most of the cost plus a "tariff income" of £1 per week for every £250 of capital in that band. Below £14,250 your capital is ignored — only your income (State Pension, private pension, attendance allowance) counts toward fees. The thresholds have been frozen in cash terms since 2010/11. Wales is more generous (capital limit £50,000, charge capped). Scotland uses £35,000 upper / £21,500 lower (April 2026) and provides free personal and nursing care. Northern Ireland uses similar limits to England but applies them differently — see nidirect.gov.uk.
- Does my house count in the means test?
- It depends. If your spouse, civil partner, a relative aged 60+, a relative with a disability, or a dependent child still lives in the home, the property value is disregarded entirely for as long as they live there. If you are a single person moving permanently into a care home, your home is disregarded for the first 12 weeks and then counted. This 12-week disregard exists specifically so you have time to arrange a deferred payment agreement or decide whether to sell. Many people miss the window because they did not know to apply — the council does not always volunteer the option.
- What is NHS Continuing Healthcare and how do I apply?
- NHS Continuing Healthcare (CHC) is fully-funded care arranged and paid for by the NHS for adults whose main needs are deemed health-related rather than social. If you qualify, the NHS covers 100% of the cost of care wherever it is delivered — your own home, a care home, or a nursing home — and there is no means test. The criteria turn on whether you have a "primary health need" judged across 12 care domains (mobility, cognition, behaviour, drug therapies, breathing, continence, skin, communication, psychological, nutrition, altered consciousness, other significant needs). The national framework is set by NHS England (revised 2022, still in force in 2026). Apply via the local Integrated Care Board (ICB). It is famously difficult to get — Age UK estimates only around 6% of older adults in care receive it — but worth fighting for. Beacon CHC and Compass CHC are independent advocacy services that will assess your case for free.
- What is an immediate needs annuity?
- An immediate needs annuity (also called a "care fees annuity" or "care plan") is a specialist annuity bought as a one-off lump sum that pays a guaranteed income for life directly to the care provider. Because the payments go straight from the insurer to the care home, they are tax-free under section 725 of the Income Tax (Trading and Other Income) Act 2005 — a substantial uplift on what the equivalent capital could earn in drawdown. Pricing is medically underwritten: a 90-year-old in poor health gets dramatically better rates than an 80-year-old in good health. The main UK providers in 2026 are Just Group and Legal & General. Typical use case: someone has just sold the family home for £350,000, faces care fees of £69,000/year net of pensions, has a life expectancy of around 3–5 years, and uses ~£140,000 of the sale proceeds to lock in the fees for life — leaving £210,000 for the estate. If they live longer than expected, the annuity pays out longer; if they die early, only a limited capital protection (if bought) returns funds to the estate.
- Equity release vs deferred payment: which is cheaper?
- For paying care-home fees, a deferred payment agreement is almost always cheaper than equity release. The DPA rate from January 2026 is 4.65% simple interest; a typical lifetime mortgage is 6.55% compound. On £100,000 borrowed over four years, the DPA would accrue around £9,300 in interest; the lifetime mortgage would accrue around £29,000 in interest. The DPA also leaves the home in your name and continues the means-test treatment unchanged — the equity release lump sum, by contrast, can push your remaining capital back above the £23,250 upper threshold and disqualify you from council help on the rest of the bill. Equity release only beats a DPA where you cannot get one (council refusal, unsuitable property, the person is not yet in a care home) and you specifically want to keep the home rather than sell.
- Can I lose my home if I take equity release?
- Not in the short term. All Equity Release Council members offer a contractual "right to stay" in your home for the rest of your life, or until you move permanently into long-term care. The loan only crystallises on death, permanent care-home admission or sale. Two practical risks: (1) if both parties on a joint lifetime mortgage move into care, the property must usually be sold to repay the loan, which can be distressing if a returning spouse had hoped to come back home; (2) the no-negative-equity guarantee protects your estate from owing more than the home is worth, but it does not protect your family from inheriting little or nothing after 20+ years of compound interest. Run the numbers on a 6.55% loan compounding for 15+ years before assuming there will be much left.
- Are there better options than equity release for care at home?
- Often, yes. Check in this order. (1) Attendance Allowance — £73.90 (lower) or £110.40 (higher) per week in 2026/27 if you need help with daily living, not means-tested, ignored as income in the local-authority means test. (2) Local authority domiciliary care — if your capital is below £23,250, the council will commission care for you. (3) NHS Continuing Healthcare — for primarily health needs (see above). (4) Disabled Facilities Grant — up to £30,000 in England (£36,000 in Wales, £25,000 in NI, separate Scottish scheme) to adapt the home for wheelchair access, level showers, stair lifts. (5) A retirement-interest-only (RIO) mortgage — like equity release but you pay interest each month so the debt does not roll up. Only consider equity release once those routes are exhausted or insufficient.
Sources
Every figure on this page traces back to a primary or near-primary UK source:
- DHSC — Care and Support Statutory Guidance (2026 update) . Source for the means-test thresholds (£23,250 / £14,250), 12-week property disregard, deferred payment agreement entitlement and interest rate methodology (gilt yield + 0.15%).
- DHSC — Deferred payment agreement interest rate, January 2026 . Confirms the maximum DPA rate of 4.65% from 1 January 2026, set by the national average gilt yield + 0.15%. Reviewed twice yearly.
- LaingBuisson — Care Cost Benchmarks UK Market Report, 2025 . Source for the £1,320/week residential and £1,560/week nursing self-funded averages in England, and the regional variation underpinning typical fee bands.
- carehome.co.uk — Care Fees Statistics 2026 . Cross-checks LaingBuisson on weekly self-funder fees and average length of stay (residential ~2.5 yrs, nursing ~1.5 yrs).
- Equity Release Council — Spring 2026 Market Report . Source for the 6.55% average new fixed AER on lifetime mortgages (Q1 2026), the drawdown vs lump-sum split, and the voluntary partial repayment standard introduced in March 2022.
- NHS England — National Framework for NHS Continuing Healthcare and NHS-funded Nursing Care (2022, in force 2026) . Source for the 12 care-domain Decision Support Tool, eligibility for primary health need, and the no-charge / no-means-test rules.
- Age UK — NHS Continuing Healthcare factsheet . Source for the ~6% take-up estimate among older adults in care, the appeal route via local Integrated Care Boards, and the role of Beacon CHC / Compass CHC.
- Just Group — Care Plans (immediate needs annuities) and Legal & General — Care funding solutions . Source for the May 2026 illustrative pricing used in the calculator and Scenario 3 (roughly £3.30 of net fees per £1 of premium for an 85-year-old in moderate health), and the s.725 ITTOIA 2005 tax-free direct-to-provider treatment.
- HMRC — Insurance Policyholder Taxation Manual IPTM6100 . Source for the tax-free treatment of immediate needs annuity payments where made direct to a registered care provider under s.725 of the Income Tax (Trading and Other Income) Act 2005.
- MoneyHelper — Paying for care and support services . Government-backed guidance covering the full ladder of care funding options. Used to confirm the order of operations (CHC → means test → DPA → annuity → equity release as last resort) recommended for England.
- Scottish Government — Free Personal and Nursing Care . Source for the 2026/27 Scottish rates of £268.55/week (personal) and £120.81/week (nursing), and Scotland's £35,000 / £21,500 capital limits.
- Welsh Government — Paying for residential care . Source for the Welsh £50,000 single capital limit and the £100/week cap on charges for non-residential care.
- nidirect — How to pay care home fees (Northern Ireland) . Source for the £23,250 / £14,250 alignment to England and HSC Trust commissioning arrangements.
- FCA — Equity release products . Source for the regulatory framework requiring qualified equity release advice before sale, and the firm responsibilities under MCOB rules.
- Society of Later Life Advisers (SOLLA) . Accreditation body for advisers specialising in later-life and care funding decisions. Used to confirm the cross-disciplinary advice route preferred for complex cases.