Different types of Equity Release

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What are the two types of equity release?

Equity release is most commonly taken in one of two ways; lifetime mortgages and home reversion plans. We explore the differences below:

Lifetime Mortgages

Lifetime mortgages are a loan secured against your home. You get to live in your home, and enjoy tax-free cash that can support you through retirement.

 A lifetime mortgage means:

  • You get to continue to live in your home and are the listed owner of the property.
  • You continue to maintain your home, including insurance.
  • In most circumstances the loan isn’t repaid until the last borrower goes into long-term care or passes away. 
  • Interest is added to the loan but is rolled up. Rolling up interest means you pay interest on your interest charges. This can increase the amount you owe quickly.

Home Reversion Plans

A home reversion plan means you sell all or part of your home to a home reversion company. In return, you get a tax-free lump sum or series of smaller sums. 

A home reversion plan means:

  • You no longer own your home, whether some or all of it. However, you get to live in the property either rent free or for a nominal sum, depending on the plan you’ve chosen.
  • The proceeds of the sale of the house when the last borrower dies or moves into long term care are split according to the terms of your plan.
  • You are responsible for insuring and maintaining your home. Some home reversion companies may require inspections at a set interval to make sure the property is at a good standard.

Types of lifetime mortgages

Unlike home reversion plans, there are multiple types of lifetime mortgages available. The availability of these depends on eligibility and product options.

Interest roll-up mortgages

With interest roll-up mortgages, your interest is added up over the length of the lifetime mortgage and you pay off all the interest at the end. This can become costly quickly as you don’t have to pay monthly costs.

Optional payment lifetime mortgages

If you don’t mind paying off the interest monthly, then the optional payment lifetime mortgage could be an option. Any interest you pay doesn’t get added to the total loan sum, so your beneficiaries get more at the end.

Income lifetime mortgage

In this type, you’ll get money regularly like an income. This is also called a drawdown lifetime mortgage.

Enhanced lifetime mortgage

You may be offered an enhanced lifetime mortgage if you suffer with certain health conditions, or were a smoker, for example. You may get more equity or at a lower interest rate if you qualify for certain conditions.

Retirement interest-only mortgages

Much like an interest-only mortgage, a retirement interest-only mortgage will only charge you interest either in a set period or for life. This changes from lender to lender.

Key considerations for lifetime mortgages

Lifetime mortgages are the more popular equity release option, but there are many factors that need to be considered before taking out a plan.

House price fluctuations

It’s impossible to accurately predict the value of your house when your lifetime mortgage ends. This means that you won’t be able to know exactly how much of your estate will be left to pass on to your loved ones.

If this is a concern for you, there are products on the market that protect a certain amount of your equity as inheritance. Your financial adviser will be able to guide you through this process.

Interest costs

Most lifetime mortgages calculate interest annually, and apply compound interest, meaning your interest payments are calculated on the total you owe, not the initial sum you borrowed. 

There are some options that allow for you to repay the interest each month, but this does vary. If this is something important to you, make sure your financial adviser is aware so they can factor this into their considerations.

Early repayment options

As within any mortgage, there may be early repayment fees if you wish to end the loan early. These can be expensive and may cost you more than anticipated. It’s worth making sure you’re aware of these before you take out a policy.

Eligibility for means-tested benefits

If you are currently on means-tested benefits, then equity release may affect your eligibility of them. Similarly, if you apply for means-tested benefits in the future then your lifetime mortgage may affect that.

Key considerations for home reversion plans

As home reversion plans mean that part of your home is owned by a company, there are some key areas you should be aware of.

Lifetime mortgages vs home reversion plans

While both are types of equity release, there are two major differences between lifetime mortgages and home reversion plans

Home ownership

With a lifetime mortgage you retain full ownership of your home and are able to live in it.

However, with home reversion, you sell some or all of your home to a home reversion provider. Therefore, you won’t retain 100% ownership of your home.

Interest payable

Lifetime mortgages require you to pay interest on your loan either when the plan ends or as you go along, depending on the type of lifetime mortgage you have. 

With home reversion plans, there are no interest payments, as this is factored in to the initial house value given to you.

Which equity release product is right for you?

With so many types of equity release, it might be confusing to understand what the right option is for you. Our equity release advice service is impartial and fully regulated by the FCA. While we do have our own range of equity release products, if our product isn’t right for you, we won’t suggest it. 

We’re here to help, have a commitment-free chat with one of our friendly advisers today.

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