If you’re thinking about using your home to raise funds for retirement, equity release could be the way forward. But what are your options, and how do equity release schemes work anyway? Let’s take a look…
Last updated 21st May 2019
If you’re over 55 and a homeowner…
You may be considering using equity release to unlock money from your home, without having to downsize to a different property. If this sounds like you, you’re in good company – because equity release is becoming increasingly popular among homeowners in the UK.
In fact, every 15 minutes, someone unlocks tax-free cash from their home with equity release.
It’s all about you
Whichever type of equity release scheme you choose, you’ll gain access to tax-free cash without having to move home. And if you still have a mortgage left to pay, any funds you release will go to pay this off first. Once that’s all sorted, any money left over is yours to spend as you like.
Everyone’s different, so finding the right equity release plan for you will depend on your individual circumstances. There are two main equity release schemes to consider:
- Lifetime mortgages
- Home reversion plans
An independent expert adviser will be able to help you decide which type of equity release scheme suits you best. But in the meantime, we’re here to shed some light on the most common equity release plans on offer.
A lifetime mortgage is the most popular kind of equity release scheme. Basically, it’s a loan secured on your home – you stay where you are and retain ownership of your property. You don’t necessarily have to make monthly payments. Instead, when you pass away or move into permanent care, your home is sold – and the loan and interest are repaid from the proceeds.
Here are a few key features of lifetime mortgages:
No negative equity guarantee
This means you could never owe more than your home is worth. So you don’t need to worry about leaving your family in debt.
You still own your own home
If you and your partner are both on the equity release contract, you are the sole owners of your home until you both pass away or go into permanent care. And you’ll never be forced to move.
You can still move house
If you need to move house, it’s possible to do so – as long as you’re moving to a ‘suitable alternative property’ that meets the criteria of your equity release provider.
You can still leave an inheritance
Once your home has been sold to pay off the lifetime mortgage and interest, any money left over can go to your family. You can also choose to ringfence some of the value of your home to leave as an inheritance when you take out a plan.
Your lifetime mortgage options
1. Roll-up lifetime mortgage
- You get a cash lump sum and maintain home ownership
- There are no monthly repayments
- Interest will accrue on the amount of money you release
- The interest and lump sum will be paid off when you (and your partner in the case of joint applications) pass away or moves into permanent care
2. Drawdown lifetime mortgage
- A drawdown lifetime mortage is just like a roll-up lifetime mortgage, but you can release your money flexibly as and when you need it – rather than taking one lump sum
- You can keep money in a reserve account, ready to ‘drawdown’
- Interest won’t accrue on the money in your reserve, until you decide to release it
- This way, you can minimise the amount of interest charged
- It also gives you a safety net of a cash reserve, which you can access when you need to
3. Flexible lifetime mortgage
- As with roll-up and drawdown lifetime mortgages, you get a cash sum and keep 100% of your home
- The difference is that this type of equity release plan lets you make voluntary payments to bring down your mortgage loan amount – without incurring any early repayments charges
- Some plans come with monthly interest payment options
- If you don’t want to make any payments at all, you don’t have to
4. Enhanced lifetime mortgage
- This type of equity release scheme is only suitable for those with certain specified medical conditions
- You can unlock even more cash from your home compared to other schemes
- If eligible, you may qualify for better lifetime mortgage rates
5. Interest-only lifetime mortgage
- Rather than rolling up interest every year, an interest-only lifetime mortgage lets you pay off a certain amount of interest every month
- This way, you can manage the amount of interest that will need to be repaid when your home is sold
Things to bear in mind…
- Interest rates can be higher. It’s worth noting that the interest rate you pay on a lifetime mortgage can be higher than on a standard residential mortgage
- The amount to be repaid can grow quickly. Depending on the type of lifetime mortgage, the effect of compound interest can really add up. This means that interest accrued is added to the loan amount and then future interest is charged on top. Essentially interest is charged on interest
- Early redemption costs can be high. It’s important to remember that a lifetime mortgage is a lifelong commitment. And if you decide to pay it off early, there may be a redemption fee to pay, depending on which lifetime mortgage you have. Always check what charges may apply
If you’re considering equity release, it might be a good idea to read our article on could equity release be right for me?
Home reversion plan
This is another common type of equity release scheme. Home reversion simply means selling a part or all of your home to your equity release provider, in return for a cash sum in return. You can receive this in regular instalments or a single lump sum – it’s up to you. And you can continue to live in your property for the rest of your life or until your move into permanent care under a lease agreement.
Here are a few key features of home reversion plans:
Live rent-free in your home
Even though some or all of your home will belong to your equity release provider, you’ll have the freedom to stay in your home for the rest of your life, or until you go into long-term care.
No interest is added
Unlike a lifetime mortgage, a home reversion plan isn’t a loan, so there won’t be any interest to pay.
You don't have to sell all of your home
Instead, you can choose to sell a percentage of it. The amount of money you can release will depend on your age and your health.
You could still leave an inheritance
If you only sell part of your home, you’ll still have equity in your home. That means your estate can still benefit from any future house price rises on your remaining share.
You could release more money
Usually, this kind of plan lets you raise a bigger amount than you would with a lifetime mortgage.
Things to bear in mind…
- You’ll no longer own all of your property Although you’ll continue living in your home rent-free, the idea of not being the owner on paper can be unsettling for some
- You sell at a discounted price With a home reversion plan, you’ll be selling all or part of your property at a price below market value. In addition, if you were to die shortly afterwards, you'll have lost a significant asset, in return for little benefit
- You’re responsible for ongoing household costs You'll still be responsible for all your household bills and will be expected to maintain your property to a standard acceptable to the scheme provider
- You won’t benefit from house price rises If you sell 100% of your home to your provider, you won't be able to benefit from any future house price rises
- Your options may be limited If your circumstances change, home reversion plans aren’t always very flexible
A few key differences...
One of the main things to bear in mind is that a lifetime mortgage means you’ll still own your own home. Meanwhile, a home reversion plan means you’ll sell a share of your home in order to release cash from your house.
To make things easier, we’ve put together a table showing a few key differences between equity release schemes.
|Lifetime mortgage||Home reversion|
|Unlock tax-free cash from your home by taking a loan against your home.||Unlock tax-free cash from your home by selling a share (or all) of your property to your equity release provider.|
|You still own 100% of your home.||You could still own a proportion of your home, and live there rent-free.|
|You don’t need to make monthly repayments (although some plans let you do so). Interest is simply added to your loan.||No monthly repayments – and no interest to pay.|
|The interest is usually added to the mortgage – then the loan plus interest is repaid when your home is sold.||As your provider will own a proportion of your property, they will receive a percentage of the sale value based on the proportion of the property they own.|
|Fees could apply if you choose to pay back the mortgage early.||If you decide you’d like to buy back the share of the property you sold to your equity release provider, then you’d have to pay the full market value.|
How much money could you release?
So, how much equity could you release? Well, it’s different for everyone. But as a guide, you can usually release between 20% and 50% of the equity (or value) in your home.
Equity release providers will look at two key things when deciding how much cash you can unlock:
- How much your property is worth
- How long you’re likely to live after taking out an equity release plan
Want a better idea of how much you could release?
Our FREE equity release calculator can give you an estimate.
How could equity release help you?
Make home improvements
If you’ve been dreaming of a sparkling new kitchen, or an amazing conservatory, equity release could enable you to fund home improvements. Or, if you need to make your home more accessible, you could adapt it your home to meet your physical needs.
Boost your pension
These days, more and more people are seeing their homes as part of their pension portfolio. And if your pension savings aren’t enough to live comfortably in retirement, equity release could give your income a valuable boost.
Give a living inheritance
Some people use equity release schemes to give their family financial help – whether that’s lending a hand with a mortgage deposit, contributing to a wedding, or just supporting them through an expensive time in their life. This means you could see your family enjoy their inheritance during your lifetime.
Top tips when considering equity release
1. Consider alternative options
Equity release schemes can be a practical way to boost your income in retirement. But it isn’t the right solution for everyone. There are pros and cons to think about, and you should make sure you consider other options before making a commitment. These include downsizing to a smaller, cheaper property, and making the most of your savings.
2. Talk to your family
Make sure you speak to your family before you go ahead. Equity release can reduce the amount of money you can leave as an inheritance, so you should make sure they know where they stand. Doing this now means there won’t have any surprises later on.
3. Get advice built around you
It’s always best to seek advice from an independent expert adviser. They can help you work out whether equity release is suitable for you, and which scheme is most suitable for your needs. All this means you can make an informed decision about equity release.
4. Take your time to decide
Whichever type of equity release scheme you go for, it’s a big commitment. So be sure to take your time – and don’t feel pressured into make a decision. When you meet with your independent expert adviser, feel free to put all your questions to them, too. That way, you can have peace of mind that you and your family understand exactly what’s involved.
Find out more about questions to ask your equity release advisor.