What types of equity release schemes are there?

Available to homeowners aged 55 or older, equity release gives you access to the money that is tied up in your home, giving you a tax free cash sum to spend how you want.

But with a number of different types of scheme available, it helps to understand the differences so you can choose one that is best suited to your own personal requirements.

What does equity release mean?

Releasing equity from your home gives you a tax free cash sum that can be used to help fund your later life and retirement years.

Equity release schemes are different to traditional mortgages as you don’t have to make monthly repayments. The interest plus the original loan are paid off once you have either died or moved into care and the property is sold.

The amount of money you can release will depend on your age and the value of your home and you can still opt for an equity release scheme if you already have a mortgage in place. You would just need to repay the outstanding loan with the cash you have released.

What are the different types of plans?

types of equity release plansEssentially there are two types of equity release scheme:

Lifetime Mortgage

A Lifetime Mortgage is the most popular type of equity release scheme. A loan is secured against your home that along with the interest accrued, is only repaid once you have died or moved into permanent care and the property is sold.

You still own your own home and have the flexibility to move, as long as the new property meets the approval of your equity release provider.

Equity release interest rates do tend to be higher and as payment is made when the house is sold, will affect any inheritance you were planning on leaving to family but there are various types of lifetime mortgage these days that offer greater flexibility.

Lump Sum lifetime mortgage – pays out a single tax free cash sum in one go. The interest is accrued on an annual basis and as mentioned the balance is paid off once the house is sold.

Drawdown Lifetime mortgage – pays out an initial cash sum but also keeps a further amount in a reserve account that you can release as and when you need it. The good news here is that you only pay interest on the money you have released and not the whole amount like you would do with the lump sum mortgage.

Interest Repayment lifetime mortgage – lets you make interest repayments which in turn will reduce the amount of money owed to the equity release provider once the property is sold.

Enhanced lifetime mortgage – is designed for people with specific illnesses giving those who qualify the option to unlock a larger amount of equity and at better rates of interest.

Protected lifetime mortgage – gives you the option to ringfence some of the property value so you can be sure to leave an inheritance for family.

Try the Equity Release Calculator

Home Reversion Plan

Although still an equity release scheme, home reversion plans work in a very different way to lifetime mortgages.

With a home reversion plan you actually sell part or all of your home, in return for a tax free cash sum. This means that there are no repayments and no interest added. You get to live in your home rent free until you die or move into long term care and if you only sell part of your property, you will still have an inheritance to leave to family.

Also with home reversion plans you can usually release more money than you can with a lifetime mortgage.

It is important to point out however that when selling part or all of your property with a home reversion plan, it will be at a discounted price which is lower than the market value and you will only benefit from a rise in house prices on the share of property you still own. Therefore if you sell 100% of your property, it will be your plan provider and not you that will benefit from any future price rise.

In addition home reversion plans are not usually as flexible as the more popular option, so you may wish to consider this if you are thinking about possibly moving in the future.

Top tips – home reversion plan vs lifetime mortgage?

When comparing a home reversion plan vs lifetime mortgage, you may want to consider the following tips:

  1. A lifetime mortgage is a loan against your home whereas with a home reversion plan, you are actually selling part or all of your home.
  2. With a lifetime mortgage you still own 100% of the property, whereas with a home reversion plan you only own the proportion if any that you haven’t sold - but you can live there rent free.
  3. You don’t have to make repayments with either option.
  4. With a lifetime mortgage you incur interest. With a home reversion plan there is no interest however you won’t benefit on any increase in house prices on the proportion of the property you no longer own.
  5. With a lifetime mortgage, the loan plus the interest accrued is repaid once the house is sold. With the home reversion plan the provider receives their percentage of the property value when the house is sold, based on the proportion of the property they own.
  6. Depending on your lifetime mortgage, fees could apply if you choose to pay the loan back early. With the home reversion plan, if you would like to buy back the percentage of the property you have sold, you will be asked to pay the market value.
  7. The compound interest on lifetime mortgages is typically higher and increases quickly. With the home reversion plan you sell at a price that is lower than market value and won’t benefit from house price rises on the proportion of property you have sold.

How can I use my tax free cash?

The tax free cash that you get through an equity release scheme can be used how you want. Here’s just a few of the ways people have used their money:

Home or garden improvements

Be it a sparkly new kitchen or a relaxing conservatory, reports show using the money to fund home improvements is the main reason people choose equity release. It’s not just about adding those nice touches though, as people also use the money to future proof their property, making it more accessible so they won’t need to move when they are not as mobile as they used to be.

Pay off existing loans or debts

Whether you are trying to clear your debts and outstanding loans before you retire or just wanting start afresh with a clean slate and no monthly repayments, using the money you have released can help. And don’t forget, even if you have an outstanding mortgage in place, you could still be eligible for an equity release scheme - you would just need to pay the outstanding loan off with the money you have released. 

Give family a living inheritance

Whilst it’s true that equity release will affect any inheritance you intend to leave your family, many people use the money to provide their family with a so called living inheritance; making the most of the money whilst they are alive to perhaps help them get a foot on the property ladder or pay for education and ongoing tuition fees.

Boost retirement income

Unfortunately retirees with insufficient pension savings is an all too familiar story these days, which is why equity release schemes are becoming a major part of retirement planning for many people, making life that little bit easier by using the money as an income to help supplement existing funds.

Could equity release be right for you?

equity release scheme

How can I be sure equity release is safe?

Equity release is regulated and tightly controlled by the Financial Conduct Authority, so you are completely protected by their rules and safeguards.

In addition, many providers are also members of the Equity Release Council (EHC) which has a strict code of conduct designed to further protect customers, including the no negative equity guarantee which ensures you will never owe more than the value of your home.

The EHC also state that a potential customer can only take out an equity release plan if they have received professional financial advice as well as independent legal advice.

Therefore for your complete protection, it is important to know that whichever equity release provider you choose, they are members of the EHC.

What do I do next?

  • Check that you are eligible for equity release. You need to own you own home, live in the UK and be at least 55.
  • Use the equity release calculator to see how much you money you can get.
  • Speak to your family – equity release schemes will affect their inheritance so it is important to include them in any decision making.
  • Look at the alternatives – is it better to downsize, remortgage, live to a tighter budget or seek help from family. Our article on equity release vs downsizing may help.
  • Do your home work and ensure you understand all of the pros and cons.
  • Speak to an expert – preferably one that isn’t tied to a particular equity release provider.
  • Take your time – it’s a big decision so get all the advice you can and then take time to think about it.

How much equity could you release?

A long awaited treat

For some it’s more about ‘YOLO’ – ‘you only live once’. Your hard earned cash is there, sat in your property so why not live life to the full and use it? Why not buy that new car, caravan or motorhome? Why not go on that luxury holiday or cruise, or indulge yourself in that new hobby?

For some the money is there, waiting to be used; but if this is you, it’s worth making sure your family are happy with the ‘YOLO’ attitude to life too.

How do I choose an equity release provider?

If you want to understand more about how equity release schemes can help you, it is worth in the first instance using our equity release calculator to see how much tax free cash you could unlock and then speaking to a specialist like Age Partnership.

Age Partnership compare equity release schemes across the whole of the market and has agreed special rates with leading providers that you may not be able to get elsewhere.

Unless you choose to go ahead, the advice they provide is completely free and with no obligation. They simply help you work out whether it is suitable for you; look at the best equity release providers and provide you with a written quotation.

The decision as to whether you go ahead is completely up to you but Age Partnership will be there to help you all the way.

     

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We know it's a big decision!

That's why we have teamed up with Age Partnership one of the UK's leading equity release specialists.

Find out how much cash you could release by clicking on the button below.

Equity Release Calculator

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