Types of equity release
Last updated 15th February 2022
7 min read
As a homeowner, you’ll know that there can be value in your property.
Equity release can allow you to unlock cash from your home’s value. This money can then be used for home improvements, to provide a more comfortable retirement, or for anything else you like. Depending on the plan you choose, you can release the money as a lump sum or in smaller instalments.
There are different types of equity release schemes, some of which may be more suitable for you than others. Because it’s essentially a loan that’s linked to your home, it’s important to ensure that you fully understand your options before choosing an equity release plan.
This guide aims to explain the different types of equity release. We’ll look at the pros and cons of each type, giving you a better idea of which might be right for you.
Need an introduction to equity release first? Take a look at our other guides:
Types of equity release schemes
There are two main ways to release the equity tied up in your home without having to move.
A lifetime mortgage is the most popular equity release scheme, where you borrow money against the value of your home.
A home reversion scheme allows you to sell all or part of your property in exchange for money.
We’ll look at the two different types of equity release in more detail below. Remember that it’s always recommended to discuss equity release with an expert adviser before making any decisions relating to your home and its value.
Equity release type 1: Lifetime mortgages
A lifetime mortgage is a loan for an agreed amount of tax-free money secured against your home. You continue to own 100% of the property and don’t need to make monthly repayments on your equity release.
Instead, the money you borrow and interest accrued is paid back when you die or move into long-term residential care. Any money left over once the loan has been repaid, this will go to your estate.
To be eligible for this type of equity release, you must be:
- Aged 55 or over
- The owner of a qualifying UK property worth £70,000 or more
Types of lifetime mortgage
There are various different types of lifetime mortgage and a range of features to choose from. It’s important to sit down with your adviser to determine which type is most suitable for you.
Here’s a quick overview of the different types of lifetime mortgage equity release, or you can take a look at our in-depth overview of lifetime mortgages to find out more.
You will get a cash lump sum with no monthly repayments. The loan amount and any interest is paid off by the sale of your home when you die or move into long-term care.
A drawdown lifetime mortgage gives you the option to release your cash over time as and when you need it, rather than taking one lump sum. This helps to keep the interest down.
With a flexible lifetime mortgage, you receive a cash lump sum but also have the choice to make voluntary payments to reduce the equity release loan amount over time.
This type of equity release is only for those with specified medical conditions and allows you to unlock more cash and access better mortgage rates.
This equity release option protects a certain portion of your home to ensure that it is always there to leave an inheritance for your beneficiaries. You will usually pay a premium, and the maximum amount of equity you can release will be lower.
An interest-only lifetime mortgage gives you a cash lump sum. With this type of equity release, you are able to pay off a certain amount of the interest monthly, helping to reduce the amount of interest you pay and retain more value for your estate.
Lifetime mortgage important considerations
A lifetime mortgage is a relatively safe type of equity release for releasing capital. However, there are certain considerations that may make it more or less suitable for your circumstances.
House price fluctuations
Products offered by members of the Equity Release Council must abide by a ‘no negative equity guarantee’, which means that you will never need to pay back more than the value of your home.
However, as house prices fluctuate, you can’t predict how much, if any, of your home’s value will be left for your estate once you die following the equity release.
If you’re concerned about leaving an inheritance for your family, discuss this with your adviser. They will be able to show you equity release options that guarantee an inheritance.
Interest on lifetime mortgages
Lifetime mortgages usually have a fixed rate of interest, although products with a variable rate are available.
Most lifetime mortgage schemes calculate interest annually and add this to the initial sum that you borrowed. This is known as ‘roll-up’ compound interest and could be a good option if you don’t want to make monthly payments.
If you would prefer to keep the interest down, there are lifetime mortgage schemes that allow you to pay off interest each month. Learn more about interest rates on equity release.
You aren’t required to make monthly repayments on a lifetime mortgage. If you would like to, you can, but any early repayments are on a voluntary basis.
If you decide to pay off the loan, you may incur early repayment charges, which in some cases may be more expensive than the initial loan and interest. Be sure to check the early repayment terms with providers when choosing which equity release plan is best for you.
Equity release type 2: Home reversion
A home reversion scheme lets you sell part or all of your home to the equity release provider in return for a tax-free lump sum or regular income.
Your provider will pay below market value for your home, usually between 20% and 60% of its true value, because you also retain the right to live there rent-free until you die or move out permanently. When this happens, your home will be sold and you or your estate will receive the value of your share.
This means you’ll know exactly what percentage of your home’s value will be left to your estate on your death.
To be eligible for this type of equity release, you must be:
- Aged 55 or over (although many plans require you to be 65+)
- The owner of a qualifying UK property worth £80,000 or more
Home reversion scheme important considerations
As with any type of equity release, there are certain considerations that you should take into account before considering a home reversion scheme.
House price fluctuations
If the value of your home has risen by the time it is sold, you or your estate will only benefit from the increase in your remaining share of the property. You won’t have a claim to any profit made on the portion owned by your equity release provider.
With a standard mortgage, or where you own your own home, you benefit from the profit across the entire value of the home when property prices increase. Because the equity release provider pays below market value for their share of the equity, this can end up being less profitable than selling your home outright.
If you die or move out permanently not long after taking out a home reversion plan, you or your estate can lose out financially because the equity release provider pays significantly less than market value for their share of your home.
Certain plans do provide some protection against this, but this type of equity release plan can be much less cost effective than a lifetime mortgage in some circumstances.
What's the difference between the two types of equity release?
There are two major differences between a lifetime mortgage and a home reversion plan:
With a lifetime mortgage you still own 100% of your home. With a home reversion scheme, you sell all or part of your home to the equity release provider.
Both options allow you to retain the right to live in your home until you die, sell the property or move into permanent care.
With a lifetime mortgage, compound interest builds up over the years. This increases the amount owed when the property is eventually sold.
With a home reversion scheme, there is no interest to pay or repayments to be made. The provider allows for interest in the price they pay for the share you sell them, and you continue to live in your home rent-free.
Which type of equity release is right for me?
Your individual circumstances will dictate which type of equity release scheme is the most appropriate.
Start by considering which of the following factors are the most important for you:
- Receiving a cash lump sum
- Receiving regular payments
- Lower interest rates
- Fixed interest rates
- Lower overall cost of borrowing
- Flexible repayments options
- Retaining ownership of your home
- Providing an inheritance for your family
- Obtaining the best value from your equity
Once you’ve decided which of these benefits are most important to you, revisit the sections above on the different types of equity release scheme and consider your options.
All types of equity release products will reduce the value of your estate and could affect your eligibility for means-tested benefits. You should always discuss your options with an experienced adviser to ensure that you choose the right equity release type.
The information in this article is provided for general guidance only and is not offering financial advice.
It’s extremely important to seek out professional advice when it comes to financial decisions relating to your home. Your property is a valuable asset and likely forms a significant part of your estate, so any decisions regarding this should be carefully considered.
When it comes to the different types of equity release, it’s well worth discussing your options with a specialist financial adviser, a solicitor or both. These conversations will help you to decide which scheme, if any, is the right option for you.
If you want to learn more about equity release, here are some other articles that our customers found helpful:
You’ll also find more information and in-depth resources on our equity release page.