Types of Equity Release
All types of equity release involve being able to make use of the value of your house whilst still having the right to live there throughout you and your spouse's lifetime. For some more information on why you might want to do this, and some alternatives you might want to consider first, click here.
This page is intended to provide some basic information on the different types of equity release that are available along with some of the relative advantages and disadvantages of each type. There is no perfect or "best" solution, but the different options will only be suitable for people in certain situations.
This list is not exhaustive by any means, and only the basics will be covered here. Remember that a little information is no substitute for professional financial advice - taking an unsuitable equity release product is likely to be a costly mistake, both for you and for the ultimate beneficiaries to your estate. One thing all equity release solutions have in common is that they are not short term solutions. If you feel that one of these solutions might be appropriate for you then contact us to request formal advice.
No need to make payments to the mortgage
The amount you'll receive will be the amount borrowed minus fees
You retain the right to live in your house as long as you are able to
The Interest rate is normally fixed for life
As long as you keep up the interest payments the loan cannot grow
The amount you'll receive will be the amount borrowed minus fees
You retain the right to live in your house as long as you are able to
The Interest rate is normally fixed for life
No need to make payments to the reversion company
The proportion of your home sold normally cannot change, so the proportion of the property lost to the estate is known with greater certainty
You retain the right to live in your house as long as you are able to
The mortgage amount can increase over time to many times its initial value
The amount will be repaid when you die or move out and will therefore reduce your estate
Paying off a lifetime mortgage early can incur hefty early repayment charges
There are normally significant setup fees
The mortgage amount can increase over time if you stop paying interest
The amount will be repaid when you die or move out and will therefore reduce your estate
Paying off a lifetime mortgage early can incur hefty early repayment charges
There are normally significant setup fees
You no longer legally own all of your home and your estate will be reduced
You will miss out on the growth in value of the sold property proportion
The sold proportion is normally the property of the provider even if you were to die very soon after completion
Buying back the sold proportion can be very expensive
Home Reversion
Unlike a lifetime mortgage, a Home Reversion plan involves actually selling part or all of your home to a reversion company for a lump sum or an income, but retaining the right to live in the property for the rest of your life.
The lump sum or income you are offered will be worth less than the sold proportion of your house. The older you are at application the higher the amount you will be offered. Normally the proportion owned by the reversion company cannot change over time.
A lifetime mortgage with the interest paid monthly is much like a traditional interest-only mortgage - the loan is secured against the house and as long as you continue to pay the interest monthly the loan will not increase. Often you will have the option to cease making payments if they are no longer affordable, but then the interest will roll up.
Most lifetime mortgages do not allow interest to be paid by the borrower, so your adviser will explore these options with you before advising on a solution.
Home Reversion Plans
A lifetime mortgage is in many ways just like a traditional mortgage. A loan is made to the client and a legal charge is used to secure the lending against the property.
However, with a lifetime mortgage there is no end date and the interest charged on the loan can be "rolled up". This means that each month the interest charged is added to the loan. The next month, the interest is charged on the original loan and the interest from last month, so the total interest cost increases faster over time.
Lifetime Mortgage
(Interest Rolled Up)
Lifetime Mortgage
(Interest Paid)
The effect of Interest Roll-Up
With many lifetime mortgages there is no facility to repay the interest on the loan and it therefore accrues monthly. As the interest adds to the loan amount each month, thus each month's interest payment is higher than the last.
This means that even with a lifetime mortgage which offers a fixed rate of interest for life, the rate at which interest accrues will increase with time. The mortgage balance can therefore reach many multiples of its original size over time and can severely deplete your estate on death.
Some lifetime mortgages offer a "Safe Home Income Plan" guarantee, which states that the amount to be repaid from the estate on death cannot be greater than the value of the home at that time. However, not all lifetime mortgages carry this guarantee.
Example of
Interest Roll-Up over time
(£25,000 loan at 6% per annum fixed interest)
