What are the different types of equity release?
Equity release schemes let you unlock the value from your home without having to move property. It gives you the opportunity to benefit from tax free cash without the immediate worry of repayment.
How you achieve this though will depend on the type of equity release you choose.
Types of equity release
There are two main types of equity release:
- A lifetime mortgage – a loan is secured against your home that is repaid when you die or move into long-term care.
- A home reversion plan – you agree to sell a percentage of your property but can remain living there rent free for life or until you move into long-term care.
Now let’s take a look at the two equity release schemes in more detail.
Type One – a lifetime mortgage
A lifetime mortgage is the most popular type of equity release. A loan is secured against your home in a similar way to a standard residential mortgage. The difference is that you don’t have to make any monthly repayments.
Instead, the interest builds up over the years and is only repaid when the last surviving plan holder dies or moves into long term care. At this point the property is sold and the loan repaid.
The interest charged on this type of equity release is compounded, which means it will grow at a faster rate compared to standard residential mortgages.
You, or the youngest homeowner must be at least 55 years of age to apply and you have the flexibility to choose from the following range of features depending on your requirements.
- Lump sum – you receive your tax free cash in one go.
- Drawdown – you take an initial amount, then the remaining funds are held in reserve for you to access as and when you need it.
- Repayment options – give you the chance to repay some or all of the interest on an ad hoc or regular basis, keeping the overall cost of the loan down.
- Enhanced lifetime mortgage – pays a larger cash sum to homeowners with certain medical conditions.
- Inheritance protection – allows you to guarantee a percentage of your property value is kept as an inheritance for your beneficiaries.
To understand more about how this type of equity release works, take a look at our guide to lifetime mortgages.
Lifetime mortgage example
Let’s look at an example of how a typical lifetime mortgage works:
Homeowners: Jack and Susan, both aged 70.
Property Value: Their home is valued at £300,000.
Reason for scheme: They decide to take out a lifetime mortgage to supplement their retirement income and renovate their home.
Lifetime Mortgage Details:
Amount Borrowed: They opt to release £60,000, which is 20% of their home's value.
Interest Rate: The lifetime mortgage has a fixed interest rate of 5% per annum, compounded annually.
No Monthly Payments: They choose not to make any monthly interest payments.
Outcome Over Time:
The amount owed grows due to the compounded interest. Assuming they make no repayments, the loan amount plus interest owed after 10 years would be £98,821. After 15 years the amount would be £126,822.
Property Value Changes: If their property value increases over this period, it might offset some of the interest accrued on the loan.
Repayment: Upon their passing or moving to long-term care, the loan and the accrued interest is repaid from the sale of their property. If the property sells for more than the amount owed, the surplus goes to their estate.
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Type two – a home reversion plan
With a home reversion scheme, you agree to sell all or part of your home in return for a lump sum of money. You need to be at least 60 years of age to apply, there is no interest to pay and you can continue living in the property rent free for life or until you move into long-term care.
At this stage, your home will be sold and the home reversion company will receive their percentage of the property value.
However, your provider will pay you less than the market value for your home and you only benefit from any increase in property prices on the percentage of property you own.
To understand more about how this type of equity release works, take a look at our guide to home reversion plans.
Home reversion plan example
Let’s look at an example of how a typical home reversion plan works:
Homeowners: Linda and Tom, both aged 75.
Property Value: Their home is valued at £400,000.
Reason for scheme: They decide to go for a home reversion plan to access funds for their retirement travels and to financially assist their grandchildren.
Home Reversion Plan Details:
Percentage Sold: They agree to sell a 40% share of their home to the reversion company.
Lump Sum Received: In exchange for this share, they receive a lump sum payment of £120,000. The amount received is typically less than the market value of the share sold.
Linda and Tom continue to live in their home rent-free for the rest of their lives or until they decide to move into long-term care. They must continue to keep their home in good repair at their own expense.
Outcome Over Time:
Property Value Changes: Regardless of whether the property's value increases or decreases, the reversion company owns 40% of it.
Repayment and Inheritance:
Upon their passing or moving to long-term care, the house is sold. The reversion company receives 40% of the sale proceeds, regardless of the home's current market value. The remaining 60% goes to Linda and Tom's estate.
Lifetime mortgages vs home reversion plans – what are the main differences?
The main differences between the two types of equity release are repayment and ownership.
A lifetime mortgage is a loan that accrues interest, so you continue to retain 100% of your property’s value. With a home reversion plan, you sell a percentage of your property value. So, there is no loan or interest to pay, but you no longer own 100% of your home.
Which type of equity release is right for me?
To understand which type of equity release is right for you and to explore alternative solutions, it is important to seek professional advice.
To help you understand more about how equity release could work for you, we work in association with Age Partnership, one of the UK's leading equity release specialists.
Alternatively you can find details for other specialist brokers, IFAs and providers on the Equity Release Council’s ‘find a member’ website.