EQUITY RELEASE

Types of Equity Release

Choosing an equity release plan: Know your options

Types of Equity Release

Understanding the different types of equity release plans is a crucial step in deciding whether it is the right option for your financial circumstances. In the UK, plans approved by the Equity Release Council fall into two main categories: Lifetime Mortgages and Home Reversion Plans.

Each type works differently and comes with its own set of features and considerations.

Lifetime Mortgages

This is the most popular form of equity release. With a lifetime mortgage, you secure a loan against your home while keeping full ownership of the property.

How it works:

You can take the money as a single lump sum or in smaller, flexible amounts over time (known as drawdown).
Typically, you do not have to make any monthly repayments. Instead, the interest "rolls up" (compounds) over the life of the loan.
The loan, plus all the accrued interest, is repaid in full when your home is sold. This usually happens when you (or the last surviving borrower) pass away or move into permanent long-term care.
Some modern plans offer the option to make voluntary repayments to reduce the impact of compounding interest.

Home Reversion Plans

A home reversion plan involves selling all or part of your property to a provider at less than its full market value.

How it works:

In exchange for selling a share of your home, you receive a tax-free lump sum of cash.
You are granted a lifetime lease, which guarantees you the right to continue living in your property, rent-free, for the rest of your life.
When the property is eventually sold, the reversion provider receives its percentage share of the final sale price. For example, if you sold 50% of your home to the provider, they would get 50% of the proceeds from the sale, regardless of whether the property value has increased or decreased.
This method means you know exactly what percentage of your home's future value will be left to your estate.

Feature options you may see

Many plans come with additional features that offer greater flexibility.

No-negative-equity guarantee: A core standard of all plans approved by the Equity Release Council. It ensures that the amount you owe will never exceed the value of your home when it is sold.
Inheritance protection: This allows you to ring-fence a specific percentage of your property's future value to leave as an inheritance. For example, protecting 20% guarantees that your beneficiaries will receive at least 20% of the final sale price. Consideration: Protecting equity will reduce the amount of cash you can release.
Enhanced (or Impaired life) terms: If you have certain medical conditions or lifestyle factors, some providers may offer you a larger lump sum or a lower interest rate.
Flexible drawdown facility: This sets up a pre-agreed cash reserve that you can draw money from as and when you need it. Interest is only charged on the funds you have actually taken, making it a more cost-effective option than taking a single large lump sum.
Voluntary/Interest-serviced options: Some lifetime mortgages allow you to pay some or all of the interest each month, or make ad-hoc voluntary repayments, to reduce the overall cost of the loan and protect the equity in your home.

Who might suit which option?

A Lifetime Mortgage is often chosen by individuals who wish to maintain full ownership of their home and appreciate flexibility, such as the ability to draw down or make voluntary payments.
A Home Reversion Plan might appeal to those seeking certainty about the exact proportion of their property's value they can pass on as an inheritance and who are comfortable with not being the sole owner anymore.

Key risks and costs to remember

Before proceeding, it is crucial to carefully evaluate the significant risks and costs involved. These include arrangement and advice fees, the interest that accrues on the loan, potential effects on means-tested benefits, and substantial early repayment charges if you choose to end the plan early. You should also consider how the plan might impact your ability to move home in the future.

EQUITY RELEASE (INCLUDING LIFETIME MORTGAGES AND HOME REVERSION PLANS) WILL REDUCE THE VALUE OF YOUR ESTATE AND CAN AFFECT YOUR ELIGIBILITY FOR MEANS-TESTED BENEFITS.