The equity release industry has moved on in leaps and bounds over recent years. With the introduction of a wide range of lifetime mortgages, and the industry becoming very highly regulated, it is unrecognisable compared to even ten years ago.
This could lead you to wonder, what are the types of equity release plan that are currently available?
The two types of equity release:
1. Lifetime Mortgages provide cash which does not need repaying until you pass away or enter long term care. Plans start from age 55, and you retain full home ownership.
2. Home reversions start from age 60 and can provide more cash, but require selling part/all of your home.
The Equity Release Council also set standards for providers and advisors to follow. Because of the extra protection that you're provided, I will only recommend a plan which meets the Equity Release Council standards.
More than 99% of the equity release plans that I recommend are Lifetime Mortgages, and by the end of this guide you will know why.
Let's explore the different types of equity release plan available, and the pros and cons of each.
In this guide, you will learn:
Lifetime mortgages are a special type of mortgage which are available to homeowners over the age of 55. You can use the cash released for anything that you wish. Lifetime mortgages allow you to release funds from your primary residence, with no mandatory monthly repayments.
As their name suggests, they are designed to run for the rest of your life, until you pass away or until you go into long term care. At which point the capital borrowed, and interest accrued, will need to be repaid. Most often, the amount owed is repaid from the sale proceeds of your property. However, it can be repaid by any means that you or your beneficiaries wish.
Since first introduced, lifetime mortgages plans have grown in the number available, the competitiveness of rates and the variety of additional features available for differing individual requirements. According to the Equity Release Council's 2020 Spring Market Report, the number of equity release plans has now surpassed 300, which is 42% more than the previous year!
Let's look at the latest features available with lifetime mortgages:
Lump-sum and initial advance with reserve facility (drawdown lifetime mortgage)
Depending on how and when you plan to spend the money released with a lifetime mortgage, it may be better to take a lump-sum or a drawdown plan. With lump-sum lifetime mortgages, you are given all the funds at once. With drawdown plans, you will have an initial advance for the funds that you need now, and have a pre-agreed reserve facility that you can draw upon as and when required.
You can think of the reserve a little like a savings account. The most significant advantage with a drawdown plan is that it is only funds that you have drawn upon that will attract interest.
The sum held in reserve will not attract any interest, and this can save you thousands of pounds in interest charges.
I typically recommend that you take a lump-sum lifetime mortgage if you are planning to spend all the funds within the next couple of years. Else I suggest looking at a drawdown lifetime mortgage instead.
Let's look at an example of a drawdown equity release plan:
Jane knows that she needs £20,000 now to repay her existing interest-only mortgage.
Jane would like to stay in her property later in life but thinks that she would like a new bathroom and kitchen in five years. She may also need a new boiler too.
Initially, Jane thought about taking out £70,000 to cover these expenses, but her adviser recommended otherwise.
The solution
A lifetime mortgage providing an initial lump sum of £20,000, with a reserve facility of £50,000 for use later. Jane benefits from a 4% rate of interest on the money she needs now. However, she isn't stuck paying interest on the money needed in the future while it sits in her bank account not ready to be spent.
The difference
If Jane took £70,000 now at 4% interest, the amount owed would grow to £85,166 after five years (£15,166 in interest).
By taking £20,000 now, the amount owed after five years is only £24,333 (£4,333 in interest).
In this example, the reserve facility acts a bit like a savings account, whereby she can access the money as she needs it in the future without having to pay interest now.
By only taking the money she needs now Jane saves £10,833 in interest in the first five years.
As you can see, the difference can be massive!
Interest rates for lifetime mortgages may be fixed or variable.
The majority of lifetime mortgages come with a fixed-for-life interest rate, which is set at the outset and will be the same for the life of the plan. Variable rates are also available; these may start lower but may also increase through the life of the mortgage. There is however a cap or upper limit that the lender may charge on a variable plan which is written into the mortgage offer per the Equity Release Council standards.
With a fixed-for-life interest rate on a lifetime mortgage, you will know exactly how interest is accruing on the loan. The interest rates may be slightly higher than a residential mortgage, but you do not need to worry about having to re-fix your rate. It will remain the same for the whole duration of the lifetime mortgage, be that 1 year, or 50!
You can read more about fixed and variable interest rates in our article - Is equity release interest fixed?
With a lifetime mortgage, you will always own your home.
With a lifetime mortgage, you will always own 100% of your home. Your equity release lender will have a charge on your property, which is the same as if you were taking out a residential mortgage.
This is one of the most significant differences with lifetime mortgages compared to home reversion plans, and also the biggest myth with equity release plans. You do not lose homeownership with a lifetime mortgage.
A requirement by your lender will be that any current mortgage or secured loan to be paid off as part of the process, so they will then have the sole charge on the property.
No monthly payments or choosing to pay the interest.
With a lifetime mortgage, you are not required to make any monthly payments. Any payments which you choose to make will be voluntarily only.
At the end of the first year of your lifetime mortgage, the interest will be calculated and added to the initial capital sum you borrowed. At the end of the next year, the interest will be calculated and added to the new total. This process continues each year and is known as 'roll-up' compound interest.
If one of your reasons for taking equity release is not to have any monthly payments, then a 'roll-up' lifetime mortgage maybe your best option. If however, you would like to keep the interest build up as low as possible, you may wish to service the interest. Making voluntary payments will give you the option to leave more to your beneficiaries. You may want to consider an interest-serviced lifetime mortgage or a 'roll-up' plan with the opportunity to make voluntary payments.
You can read more about compound interest and paying all or some of your interest in our article - Equity release without the compound interest.
There may be money which you wish to borrow, but you do not meet the affordability requirements for other types of finance. With the option to release funds from your home, you will be able to maintain your lifestyle without being committed to regular monthly payments.
No negative equity guarantee.
All lifetime mortgages which meet the Equity Release Council council standards include a no negative equity guarantee. Put simply; it means that neither you nor your estate will ever owe more than the property is worth when sold.
When you take out an equity release plan, you will still own your property, and you will have the right to live in it until you pass away or go into long term care. When your property is sold, the equity release is repaid, and any remaining proceeds belong to your beneficiaries.
Should your property have a significant decrease in value, it may be that there are not enough funds from the sale to repay the equity release. If this situation should arise the maximum amount the lender would be able to request is the value the property sold for, less the associated costs of selling.
The 'no negative equity guarantee' means that the lender will waive the remaining loan balance, and no debt will be passed on to your beneficiaries.
Downsizing Protection.
Sometimes the situation may arise whereby you have a lifetime mortgage and would like to downsize. In such a case, you can either port the lifetime mortgage to your new property or pay off the equity release. If you choose to repay the lifetime mortgage, you may be charged an Early Repayment Charge (ERC).
The downsizing protection feature waives any potential ERC when you are selling your property to purchase another property which will be your primary residence.
Different lenders have different terms for downsizing protection. Some lenders will only allow you to repay without an ERC when the new property is not one that they will accept. Others will allow you to repay without incurring an ERC when you sell your home. You will find more detail on how you can move home if you have equity release in our article moving home with equity release.
Using equity release to help purchase a new home.
Lifetime mortgages have become popular when purchasing a new home. They are handy if you do not have the income levels to be accepted for a residential mortgage. Suppose you are moving to an area where the property may be more expensive, or you have a large mortgage to clear on your current property. In that case, a lifetime mortgage could be a fantastic option for you.
The property sale, mortgage repayment and new property purchase are all finalised at the same time. Cash from your current property along with the equity you release from the new home will give you enough to purchase your new home. What's more, this is without having to make any monthly payments if you do not wish to.
For more in-depth information on purchasing your new home with equity release, please read our article equity release to purchase a property
Inheritance Protection – how to protect your beneficiaries.
If you wish to leave a guaranteed inheritance for your beneficiaries, a lifetime mortgage with inheritance protection could be a good option for you. The inheritance protection will act like a safety feature for you to guarantee that there will be funds left for your beneficiaries after the lifetime mortgage has been repaid.
The most common inheritance protection option allows you to protect a percentage of your home to ensure that a portion of the property is always there to leave to your beneficiaries. Once you pass away or go into long term care, the protected portion of your property value will be reserved for your beneficiaries
With inheritance protected lifetime mortgages, you will usually pay a premium, and the maximum amount that you may release will be less.
How much equity can you release using a lifetime mortgage?
Lifetime mortgages are currently the most popular form of equity release.
We have a handy equity release calculator which shows you the maximum amount that you can release.
Examples of lifetime mortgages on a £300,000 house:
At age 55:
Perfect Health - The maximum equity release is £73,500 (£300,000 x 24.5%)
Medically Enhanced - The maximum equity release is £81,900 (£300,000 x 27.3%)
At age 60
Perfect Health - The maximum equity release is £96,000 (£300,000 x 32.0%)
Medically Enhanced - The maximum equity release is £102,300 (£300,000 x 34.1%)
At age 70
Perfect Health - The maximum equity release is £126,000 (£300,000 x 42.0%)
Medically Enhanced - The maximum equity release is £131,400 (£300,000 x 43.8%)
At age 80
Perfect Health - The maximum equity release is £156,000 (£300,000 x 52.0%)
Medically Enhanced - The maximum equity release is £154,500 (£300,000 x 51.5%)
What are some of the downsides of a lifetime mortgage?
There are areas that you may have concerns with before taking out a lifetime mortgage, but we are always happy to discuss these with you.
Suppose you elect not to make any repayments to your lifetime mortgage. In that case, the interest will roll-up, and you will attract interest on top of interest (compounding interest). The younger that you are, the more significant the impact this will have on the balance owed at the end of your lifetime mortgage.
There are, however, options available to you to lessen the impact of interest building up on your plan. I have written another article all about equity release without compound interest.
If you receive any form of benefits, it is essential to understand how your eligibility will be affected. Equity release funds are not classed as income, so will not impact on means-tested benefits. They are, however, classed as savings, and you will need to be sure that you fall within government guidelines on savings limits, to remain entitled to your benefits. See our article for more detailed information on how equity release will affect your benefits.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
With a home reversion plan, you will sell all or part of your property to the reversion company. In return, you will receive a cash lump sum, a regular income, or a combination of both.
The home reversion plan will come with a lease agreement giving you the right to live in your home until you pass away or go into long term care. There may be a nominal ground rent charge, or you may opt to have a higher rental amount to achieve a larger equity release.
As you home becomes the property of the reversion provider, you will no longer have the benefit of retaining full homeownership like you would with a lifetime mortgage.
If you sell a part of your property, then when you pass away or go into long term care, your property is sold. You or your beneficiaries will receive your share of the proceeds of the sale, less the percentage that you sold to the home reversion provider.
Let's look at an example of a home reversion plan:
If you sell 30% of your property to a home reversion provider, when the property is sold they will keep 30% of the proceeds.
This means that they benefit from the future sale price, not just the price the property was when you took out the home reversion plan.
As we have seen significant property growth over time, the amount that they may receive could be far more considerable than if you took out a lifetime mortgage.
Home reversion is available from age 60, and the older you are, the more significant percentage you will be able to achieve from the market value of your home.
There are also options with home reversion plans on how you receive the funds. You may opt for a lumps sum, an income option or a mixture of both.
Suppose you are unable to obtain enough funds through a lifetime mortgage to clear an interest-only mortgage. In that case, you may find that you can release a more considerable sum through a home reversion plan. You will always need to speak with an equity release adviser before you commit to any plan.
Although home reversion allows you to live in your property rent-free, some options will enable you to pay a regular fixed rent or escalating rent. Both of these will allow you to receive a larger sum from the lender, but you will need to be sure you can commit to the monthly rental payments.
Remember. With home reversion plans, there are essential points to consider:
- You will no longer be the owner of your home.
- If you end the plan early, you will then have to buy back the share you sold at the full market value; this may be well above the sum that you initially paid for it.
- The cash that you initially receive will be far less than the percentage of your home you are selling.
For some people, a home reversion plan may not have the flexibility they require. It may not be portable from one home to another if your circumstances change.
Although this type of plan may not be suitable for many, it may allow you to receive the funds you require.
Between 1996 and 1998, Shared Appreciation Mortgages were offered by a few banks as a way to release equity in your home without the need for monthly payments.
With a SAM, the bank would lend you a sum of money, usually around 25% of your property value, on an interest-free basis. In return, the SAM lender would be owed the initial money borrowed plus a share of the appreciation of the property value.
You would pay no monthly repayments of interest until the property was sold or the borrower passed away. When the property was then sold, the bank would then be entitled to the total of the initial advance lent, plus an additional sum of up to 3 times the increase in the value of the property.
If the initial loan was 25% of the property value; when the property is sold the lender would be entitled to the sum borrowed, plus a 75% share of the increase in the property value.
The lenders who offered SAM's share examples of how this would fare over 20 years using an initial property value of £100,000 and a final sale value of £150,000. On a loan of £25,000, this gives an equivalent compound interest rate of 4.7%.
What then happened is house prices began to skyrocket. So, although there were no monthly payments of interest, the amount that would be due back to the bank when the property sold was vastly disproportionate to the original amount borrowed.
Let's look at an example of what homeowners with SAM's could now be facing:
Property value when taking out the SAM in 1996: £100,000
Loan at 25% = £25,000
Property value estimate 20 years later: £400,000
Repayment = £25,000 + (75% x £300,000) = £250,000
This amounts to 62.5% of the final valuation figure being payable to the bank. So if the plan had indeed run over a 20 year period, it would be equivalent to a compound interest rate of 12.2%.
Therefore, because of the property growth that we have seen, the mortgages can be very expensive!
SAM's were only available for a short period of time and are no longer available.
Still, Shared Appreciation Mortgages are a widely debated form of equity release and one which still harms the industry's reputation, despite not being available for over 20 years!
Finding which is the best type of equity release plan will involve speaking with an equity release advisor. They will take into consideration a wide range of factors, including:
- Your property value
- Your property type and construction methods used
- Your age (and the age of any other homeowners)
- Your current financial and lifestyle requirements
- Your future needs
Some lenders also offer more funds or lower interest rates, depending on your health and lifestyle.
With the information gathered, we will then be able to break down the lending options for you. Depending on your requirements, some lenders may be a better option for you than others.
For example; one lender may be best for medically enhanced options, another for older borrowers, non-standard properties, large loan amounts, low early repayment charges, lowest interest rates etc.
Important! Make sure that the equity release plan that you are recommended meets the Equity Release Council standards.
Our advisers will take into account all of the information you provide to research the best options for you. They will present their findings and discuss them with you but remember it is also an opportunity for you to ask questions. We have written 13 great questions to ask your equity release advisor to help you cover everything you may want to consider.
See in more detail what will be involved in an equity release advice meeting in our article about equity release advice meetings.
As time passes, home reversion plans remain static, while lifetime mortgages are becoming more and more flexible. Many of the features that you are used to on a standard residential mortgage are now commonplace with lifetime mortgages.
Let's look at the table below, highlighting some of the similarities and differences between the two equity release plans currently available, a lifetime mortgage and a home reversion plan:
|
Home Reversion Plan |
Lifetime Mortgage |
| You retain full ownership of your property. |
No |
Yes |
| The mortgage lender has a registered charge on your property. |
N/A - You are selling part/all of your home. |
Yes - The same as a residential mortgage. |
| What is the maximum loan amount? |
Based on your age and your property value. |
Based on your age and your property value. |
| Your eligibility is based on your income and expenditure? (affordability assessed) |
No |
No |
| Mandatory monthly payments are required. |
No |
No |
| Voluntary payments can be made. |
Sometimes |
Yes |
| Minimum age of applicants. |
60 years old. |
55 years old. |
| Maximum age of applicants. |
No maximum age. |
No maximum age. |
| You have the right to live in your property for the rest of your life. |
Yes |
Yes |
| Your interest rate is fixed. |
N/A - You are selling part/all of your home. |
Yes for the lifetime of your mortgage. |
| Move Home When You Want |
No |
Yes |
| Downsizing Protection |
No |
Yes |
| Significant Life Event Exemption |
No |
Yes |
As you can see, lifetime mortgages are vastly superior in nearly every way. This is why over 99% of the equity release plans that I recommend are Lifetime Mortgages.
Retirement Interest Only Mortgages (RIO's) are not an equity release plan. But, RIO providers often require you to receive financial advice from an equity release advisor before applying.
RIO's are an interest-only mortgage which does not have a fixed end of term date. Instead, they run for the rest of your life.
A RIO mortgage will commit you to pay the interest each month, so the amount you owe doesn't then increase over time.
To take out a RIO, most lenders will give you the option to borrow up to 75%-80% of your properties worth; meaning you would require a deposit of 20%-25%.
You will also need to pass the mortgage affordability checks to prove you can afford the interest-only repayments. The element that is similar to equity release is that the mortgage is only paid off with the sale of your property when you pass away or go into long term care.
With a RIO, you won't have the worry of compound interest building up over the life of the plan. However, you will be required to pay the monthly interest payments for the life term of the mortgage.
A RIO may have lower interest rates than a lifetime mortgage. However, the amount you may borrow will be based on your retirement income and your loan to value ratio. Plus, the interest rate is not fixed-for-life like a lifetime mortgage. Instead, you will need to re-fix your interest rate at the end of the initial fixed period. Else you will revert to the Standard Variable Rate, which usually will be higher.
For younger retirement borrowers, it may sometimes be a stepping stone between your standard mortgage and taking an equity release mortgage. Your adviser will compare the rates to find the best option for you.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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