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Home > What is Equity Release? > Types of Equity Release
UNDERSTANDING THE DIFFERENT TYPES OF EQUITY RELEASE
With various Equity Release plans, it’s important to know the differences.
Understand the different equity release plans, whether you’re likely to be eligible, how they work and the benefits and important considerations of each.
What is a Lifetime Mortgage?
A lifetime mortgage is the most common type of equity release. It’s a loan secured against your home, allowing you to access some of its value. The full loan is usually repaid when you move into long-term care or pass away.
There are two ways to release funds with a Lifetime Mortgage, in one lump-sum or gradually drawing down using a reserve facility.
With a lump-sum, you would receive all the money in one go. Alternatively, a Lifetime Mortgage reserve facility allows for an initial release but with an agreed amount held in a facility by the lender, until you need it in the future. You would only be charged interest on the funds from the point they are drawn, with an interest rate fixed at this point too.
Who can apply?
- For a lifetime mortgage you (or both named parties on the deeds of the house), need to be aged 55 or over
- You must own the property in the UK, and it must be your main residence
- Your property must be worth over £70,000
- You can still apply if you have a mortgage or secured loan, but you must pay it off when releasing equity.
How does it work?
- If approved, you can take a tax-free lump sum or access smaller amounts over time.
- Interest is added to the loan each month or year (compound interest).
- The loan, plus interest, must be repaid when the last borrower moves into long-term care or passes away.
Benefits
- Receive a lump sum or access funds when needed.
- Fixed interest rates for life.
- No monthly repayments required (unless you choose to make voluntary payments, subject to certain limits).
- You remain the full owner of your home.
- No formal affordability checks.
Important Things to Consider
- Interest builds up over time, increasing the total amount owed.
- Any existing mortgage must be repaid when taking equity release.
- It could affect entitlement to means-tested benefits, now or in the future.
- It reduces the value of your estate and will impact inheritance.
- May limit future funding options for long-term care.
- Early repayment charges may apply if you repay more than allowed.
What is a Home Reversion Plan?
A home reversion plan lets you sell all or part of your home to a provider in exchange for a tax-free lump sum. You can stay in your home rent-free for life, but you won’t fully own it anymore.
Who Can Apply?
- You must be aged 70 or over.
- You must own a property in the UK that meets the provider’s criteria.
- If you have a mortgage or secured loan, you must pay it off when releasing equity.
How Does It Work?
- You sell part or all of your home to a home reversion provider.
- In return, you get a lump sum or regular payments.
- You can stay in your home for life, but you no longer fully own it.
- When the property is sold (after you pass away or move into care), the provider takes their share, and any remaining value goes to your beneficiaries.
Benefits
- You can stay in your home for life, rent-free.
- You get a tax-free lump sum or ongoing instalments.
- Unlike a lifetime mortgage, there’s no interest to pay.
- You can ring-fence a percentage of your home’s value to leave as inheritance.
Important Things to Consider
- The provider buys your home for substantially less than market value.
- Your estate’s value will be significantly reduced.
- May affect means-tested benefits now or in the future.
- Changing your plan later may not be possible.
What is an Interest Servicing Lifetime Mortgage?
An interest Servicing Lifetime Mortgage is a type of lifetime mortgage where you repay some or all of the interest on your loan each month. Where interest is paid in full each month, the amount outstanding on the loan will stay the same until it’s repaid. The full loan is usually repaid when you sell your home, move into long-term care, or pass away.
Who Can Apply?
- You must be at least 55 years old (some lenders have different age limits).
- You need to own a UK property that meets lender requirements.
- You must be able to afford the monthly interest payments.
How Does It Work?
- You borrow money against your home and make monthly interest payments.
- Where interest is paid in full, the initial borrowed amount stays the same, as you’re preventing interest from compounding.
- You may be able to access a lower interest rate due to the commitment to pay monthly repayments.
- The loan is usually repaid when you sell your home, move into long-term care, or pass away.
- You can stop payments, but interest will start to compound.
- A certain number of missed payments are allowed, but exceeding this will require switching to a non-payment plan, where you’ll lose any lower interest rate and move to the standard rate.
Benefits
- Where the interest is paid in full, this keeps the loan amount fixed instead of growing over time.
- Less debt (vs a non-payment lifetime mortgage) impacting your estate which may mean leaving more for beneficiaries.
- You keep full ownership of your home.
- Offer flexibility to stop payments if your situation changes, or take payment breaks.
Important Things to Consider
- You must keep up with monthly interest payments to avoid reverting to a non-payment lifetime mortgage, without any discounted rate and with compound interest.
- There are no lender affordability checks, however you must consider if there is a change in your circumstance, could you continue to afford to make repayments. Your adviser will help with this.
- May affect means-tested benefits, now or in the future, depending on your financial situation.
- Early repayment charges may apply if you repay more than allowed.
Equity release may involve a home reversion plan or a lifetime mortgage, which is secured against your property and will reduce the value of your estate and impact funding long-term care.
Equity release requires paying off any existing mortgage. Any money released, plus accrued interest would be repaid upon death, or moving into long-term care.
We provide initial advice for free and without obligation. Only if your case completes would our advice fee of £1,695 be payable. Other lender and solicitor fees may apply.
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Looking for more information?
Am I Eligible for Equity Release?
Find out if you’ll be eligible for equity release. Learn about the criteria which you and your property may have to meet and alternative options.
The Process of Releasing Equity
Find out more about the application process, the conversations you will have with you adviser and the step-by-step process.
We’ve compiled some of the most frequently asked questions, to help you understand if equity release is right for you.