For the growing number of older homeowners working out how to manage their retirement finances, it’s important to understand the different types of equity release schemes that are available.
Equity release plans continue to evolve and boast a variety of features, such as the option to make regular payments towards the interest, to access the money in stages, or even to guarantee an inheritance to loved ones.
Here, we outline the different types of equity release and explain how each one works.
The main types of equity release
There are two main types of equity release scheme: lifetime mortgages and home reversion plans. Both enable homeowners aged 55 and over to release cash from their properties and both allow homeowners to stay in their homes until they die or enter long-term care.
The chief difference between the two is that a lifetime mortgage is secured against your property and you retain full home ownership, whereas with a home reversion plan you must sell a share of your home.
1. Lifetime mortgages
Lifetime mortgages enable homeowners aged 55 and over to borrow against the value of their home, while retaining full ownership. Many lifetime mortgage lenders choose to become a member of the industry trade body, the Equity Release Council (ERC). The ERC has helped the market to evolve over time, with all lifetime mortgages from lenders that are members offering the following safeguards:
- You retain 100% ownership of your home until you die or go into long-term care.
- You are not required to make monthly repayments.
- You can fix the equity release interest rate for the life of the mortgage.
- All lifetime mortgages will have a no-negative-equity guarantee that ensures you will never owe more than the value of your home.
The lifetime mortgage market has also grown to offer a wider range of product choices, bringing with it an increase in the flexible features that may also be available.
Lump-sum lifetime mortgages
This type of equity release plan is secured against your home and provides you with a single tax-free cash lump sum. It accounted for 43% of all new plans in the UK last year.
A lump-sum lifetime mortgage offers the advantages of spending the entire payment straight away if necessary, fixing the interest rate for life or making additional payments if you choose. But you should be aware that you pay interest on the whole sum, regardless of when you use the money, and the interest will build up on the mortgage over time.
Drawdown lifetime mortgages
Drawdown lifetime mortgages are also secured against your home, but offer the added flexibility of allowing you to withdraw money in stages, rather than all at once. Interest is only applied to money that is withdrawn, so it can accrue more slowly and may reduce the overall cost of releasing equity. However, because the interest is fixed at the prevailing rate each time you access funds, the rate may differ for subsequent withdrawals.
This type of equity release scheme accounted for three in five of all plans agreed in the UK in the final quarter of 2021, when the sector returned to growth.
Interest-only lifetime mortgage features
Some lifetime mortgage products come with the option to pay the interest monthly. As the payments are voluntary and not required, there are no affordability checks. Additionally, as you service the interest, the overall cost of borrowing will be reduced.
However, if you were to choose a variable interest rate and rates rise, your repayments will also increase. It is worth noting though that lenders who are ERC members will offer a cap that the variable rate cannot go above.
Additional features
Whichever type of equity release you choose, look out for these flexible features:
Optional payments – If you don’t plan to commit to clearing the interest monthly, you could choose a product that allows optional repayments, usually of up to 10% of the initial amount released per year.
Inheritance guarantees – Some lifetime mortgages will allow you to guarantee an inheritance by ring-fencing a portion of your home’s value, although this will reduce the equity that you can release.
Calculate how much you could release with a lifetime mortgage
2. Home reversion plans
With this much less popular type of equity release plan, you sell all or part of your home in exchange for a tax-free cash lump sum or a regular income, with the right to stay in your home – rent-free – for as long as you choose.
When you die or enter long-term care, your house will be sold, and the reversion company will take its share of the proceeds. If you sold the whole property as part of the plan, all the proceeds go to the company; if you only sold a percentage, it will take its share and the rest will go to your beneficiaries. The main drawback of home reversion plans is that you receive only between 20% and 60% of your home’s market value.
Telegraph Media Group’s equity release partner, Responsible Equity Release, does not advise on home reversion plans. This is because you do not retain complete ownership of your home and they don’t offer the same value for money as a lifetime mortgage.
Things to consider
Choosing to release equity through any of the available schemes will reduce the future value of your estate. An injection of tax-free cash could also affect your entitlement to means-tested benefits. That’s why it’s imperative to receive qualified advice in advance.
Expert equity release advice
To understand fully how equity release works, and how different types of equity release schemes could affect your finances, it is imperative to seek expert advice. The Telegraph Media Group has partnered with market-leading lifetime mortgage specialists Responsible Equity Release to provide you with an equity release service.
Responsible Equity Release can offer you a free, no-obligation consultation with one of their fully qualified advisers. You will be offered tailored equity release advice based on your personal circumstances, with the guarantee that all products offered will meet the highest standards of customer protection.
If you decide that an equity release plan is right for you, your adviser will help you with every stage of the application process, including the paperwork and the administration.
Read more:
The Telegraph Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,690.
The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.
Information correct at date of publication.
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