Types of Equity Release Schemes In the UK

When it comes to retirement planning, there are a lot of different options to choose from. One option that is growing in popularity is Equity Release. This is a way for retirees to access the money they have tied up in their home without having to sell it. There are a number of different Equity Release schemes available, and each one has its own benefit.

The different types of Equity Release schemes are:

• Lifetime Mortgages
• Lump-sum Lifetime Mortgages
• Drawdown Lifetime Mortgages
• Interest Only Lifetime Mortgages
• Home Reversion Plans

However, Equity Release plans are mainly classified into two types: lifetime mortgages and home reversion plans. Both allow homeowners aged 55 and over to access cash from their homes and to remain in their homes until they die or enter long-term care.

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What’s the difference between a lifetime mortgage and a home reversion plan?

The main difference between a lifetime mortgage and a home reversion plan is one allows you to retain your full homeownership, whereas for the other you must sell a portion of your home.

What is a Lifetime Mortgage?

The most well known and used type of Equity Release scheme is the lifetime mortgage. With this type of scheme, you take out a loan against the value of your home and make no repayments until you die or move into long-term care. The interest on the loan is added to the overall debt, which means that the debt can quickly increase.

Most Equity Release lenders who use lifetime mortgages tend to join, the Equity Release Council (ERC). The ERC has aided in the market’s evolution over time by requiring that all lifetime mortgages issued by members include the following protective measures:

• You keep ownership of your home in its whole until you die or enter long-term care.
• Monthly repayments are not required.
• You can lock in the interest rate on the Equity Release throughout the life of the mortgage.
• All lifetime mortgages will include a guarantee against negative equity, ensuring that you will never be forced to pay back more than the standard value of your property.

Additionally, the lifetime mortgage market has evolved to cover a wider wide range of product choices, resulting in an increase in the number of customisable Equity Release schemes.

What is a Lump-sum lifetime mortgage?

A lump sum lifetime mortgage means you will be given your full lump sum amount in one go rather than a series of instalments.

This is great if you have a big project such as a home improvement or maybe want to use Equity Release to buy a second property.

What are the advantages of lump sum Equity Release?

• Allows you to borrow the maximum amount possible in a single, one-time payment.
• The funds you release are tax-free and are entirely yours to spend as you like.
• Interest rates are competitive and are locked in for the duration of the loan.

• You retain ownership of your home.
• Repayments on a monthly basis are optional.
• This service is available for both freehold and leasehold properties.
• The plans are transportable. If you decide to relocate in the future, your plan will accompany you.
• If your plan expires, both interest accrued and the borrowed amount will be repaid. Repayment is only due when the final homeowner passes away or enters long-term care.
• The amount borrowed each year may be overpaid (without charge) up to 10% of the total.  As a result, you can pay down any interest accrued on your plan (and reduce the final balance to be repaid).

What are the disadvantages of lump sum Equity Release?

The compound interest accrued over time, as well as the amount borrowed, are repaid when the plan expires – typically when the final homeowner dies or enters long-term care.

If you default on repayments, a lump sum lifetime mortgage will have an effect on the inheritance you leave to your loved ones.

That is why, if you are considering a lump sum Equity Release plan, it is critical to consult your family.

If you claim any means-tested assistance, you are likely to lose eligibility for them because an Equity Release lump sum lifetime mortgage will likely affect your benefits threshold.

If you are receiving means-tested benefits, a drawdown lifetime mortgage may affect the benefits you are receiving. However, drawdown may be better option, to help prevent you from going over the benefits threshold as you have more control of the monthly payments and amount you receive.

What is a drawdown lifetime mortgage?

A drawdown lifetime mortgage is a type of Equity Release that allows you to access your money in a series of small instalments rather than a lump sum.

A major reason people choose an Equity Release drawdown plan is that it will allow them not to go over any means-tested benefit thresholds, and they can continue to claim benefits.

What are the advantages of a drawdown lifetime mortgage?

• You can quickly access your money at no cost to yourself or the provider.
• Drawdown plans allow you increased flexibility in terms of when and how much money can be taken.
• You will only owe interest on any funds that are received, and not on the amount helped by the provider.
• Drawdown mortgages allow you to retain your full property value, meaning if your property increases in its valuation you will still profit.

What are the disadvantages of a drawdown lifetime mortgage?

• If the interest rate is high when you make a drawdown request then you will pay higher interest than you would if you had taken an initial lump sum.
• Some Equity Release providers will cap the amount you can withdraw in a single sum.
• Having to contact a company every time you want access to funds can be irritating.
• You will have to track your income from Equity Release drawdown throughout the year and make appropriate tax arrangements, especially if you are claiming benefits.

What is an interest-only lifetime mortgage?

An interest-only lifetime mortgage is a type of Equity Release where you only have to make repayments on the interest that has accrued on the loan, and not the amount borrowed.

This can be helpful for those who are unable to commit to making regular repayments.

If you have a substantial surplus income and would want to pay enough to cover the interest on your lifetime mortgage rather than let it roll over, this type of plan may be one of the best ways to keep as much equity in your home as possible – maximising the inheritance you leave.

These types of programmes are popular among retirees who are unable to obtain a traditional mortgage, as they function similarly to a residential interest-only mortgage

What are the advantages of an interest-only lifetime mortgage?

• You won’t have to make any repayments on the amount you’ve borrowed until the plan expires.
• The interest rate is fixed for the duration of the loan, so you will know exactly how much your repayments will be.
• Your property will not be repossessed as long as you keep up with the monthly interest payments.

What are the disadvantages of an interest-only lifetime mortgage?

• The amount borrowed, plus any accrued interest will have to be repaid when the plan expires – typically when the final homeowner dies or enters long-term care.
• If you don’t make the agreed repayments, the Equity Release company has the right to repossess your home.
• You may not have enough money to last you through your retirement if you only rely on the interest from an interest-only lifetime mortgage.

What is a home reversion plan?

A home reversion plan is a type of Equity Release scheme where you sell all or part of your property to an Equity Release provider in return for a lump sum or regular payments.

You then have the right to stay in your home for the rest of your life, rent-free.

When the plan comes to an end, the provider will sell your home and you will receive the proceeds.

What are the advantages of a home reversion plan?

• You can remain in your home for the rest of your life without having to worry about rent or mortgage payments.
• The lump sum you receive can be tax-free.
• If your property increases in value, you will profit from the increase.

What are the disadvantages of a home reversion plan?

• You may not get as much money as you would if you sold your property outright.
• If your home increases in market value, then the provider will profit from this and not you.
• If you need to move, you will have to give up your home and will not be able to take it with you.
• The provider has the right to sell your home when the plan comes to an end, regardless of your wishes.
• There may be fees involved in setting up and terminating a home reversion plan.
• You will not be able to leave your property as an inheritance to family members.

What is the best Equity Release plan for me?

The best Equity Release plan for you will depend on your individual circumstances. You should consider…

1. How much money you need
2. Whether you want a lump sum or regular payments
3. Your age and health
4. The value of your property