In 2022 alone, UK homeowners have released £3,13 billion from property to pocket through equity release schemes¹.

A growing number of homeowners are choosing to release equity in their property to generate more income as they age.

An alternative like downsizing isn’t always the most desirable option, but with 2 types of equity release to choose from, it needn’t be the only one.

Our expert team is here to help you better understand your options for releasing cash through the different types of equity release. 

Read on to discover your options…

What’s Equity Release?

Equity release is the process of releasing cash or equity from a property without the need to move.

From the age of 55, you can release some of your wealth that’s tied up in property without having to move out or incur monthly repayments.

Equity release products are regulated by the Equity Release Council² and, done right, allow you access to your wealth in a lump sum, or smaller regular sums, without affecting your tax position.

What Are the 2 Types of Equity Release?

The 2 types of equity release plans are home reversions and lifetime mortgages.

Each has its own advantages, disadvantages and features.  

The Equity Release Council tightly regulates these schemes to provide a reliable financial solution as you enter retirement.

Let’s give you an overview of each.

Lifetime Mortgage

Lifetime mortgages are products designed to provide access to the money tied up in your property, without repayment, till the end of your life or move to long-term care. 

Once you reach the end of your life or move to long-term care, the amount mortgaged (accessed) is repaid. 

Usually, this amount is repaid through the sale of the property, but your family may also choose to settle it by other means. 

There are three different lifetime mortgage structures on offer.

Here’s a more detailed look at each:

Lump Sum Equity Release

Lump sum equity release plans mean receiving all the funds you apply for at once. 

This type of equity release structure can be useful if you plan on spending all the funds within the next couple of years or on big-ticket items. 

However, this also means you accumulate interest on the entire lump sum you’ve released. 

Drawdown Facility

A drawdown facility allows access to your wealth in smaller increments. 

With this structure, you receive an initial advance to spend as you wish, and the rest of your funds are put into an accessible reserve facility. 

The key detail is that interest only attracts to the amount you’ve withdrawn and not on the amount kept in your reserve.

This feature is convenient when you want to spend money on things like home renovations or holidays spread out over a few years.

Home Reversion

Home reversion schemes mobilise equity by selling part or all of your property, at below-market rates, to a scheme provider in exchange for a lump sum or regular payments.

Your provider takes ownership of your property at a percentage agreed upon by you. 

The money you can access depends on that percentage and the value at which the property’s sold. 

If you are over the age of 65, own your house, and need to access funds, you may want to explore the option of a home reversion plan.

How Does It Work?

The sale of the property happens between 20% and 60% of your property’s current market value, and you have the option of selling between 25% and 100% of your home³.

Essentially, you become a tenant in the home you used to own, but you live rent-free. 

Did you know? 

Some home reversion plans are transferable onto other properties, should you choose to move.

You’ll have to discuss this possibility with your financial advisor or broker to ensure you settle on a plan that allows this. 

What About Repayment?

Repayment happens when you die or move into long-term care and your property is sold. 

The money your buyer invested is paid out to them at the new market value, based on their percentage share. 

If there are any funds remaining, they’ll then go to your heirs.

Because you’ve sold at below market value, it also means that you’ll miss out on future property values should they rise. 

Should you choose to opt out of your home reversion plan, you’ll likely incur major costs as you’ll have to buy back the percentage you sold at the current market value.

Lifetime Mortgage vs Home Reversion

There are 3 key differences between a lifetime mortgage and a home reversion plan, namely your property title, your age of eligibility, and the matter of interest on your money.

Have a look at each.

Property Title

A lifetime mortgage means you remain the legal owner of your home while equity is released against it.

Contrastingly, home reversions mean selling part or all of your home in exchange for equity. 

Age of Eligibility

Age affects your eligibility for certain schemes. 

Lifetime mortgages are available for people older than 55, whereas you only qualify for home reversion at 65⁴. 

Interest

You only accumulate interest on your loan with a lifetime mortgage plan. 

Home reversions involve a sale, not a loan, and therefore don’t accumulate interest.

Learn more about interest on lifetime mortgages here.

What Are the Pros & Cons of Equity Release?

Both types of equity release have their own set of pros and cons. 

Carefully consider the benefits and pitfalls before deciding if equity release is right for you.

Pros & Cons of Lifetime Mortgages

The pros of a lifetime mortgage include that you retain 100% home ownership, but the cons include the effect on your inheritance⁵. 

Let’s take a closer look. 

Pros of lifetime mortgages:

• The income is tax-free and may be spent to reach your financial goals. 
• Lifetime mortgages require no monthly repayments.
• You can choose to make monthly repayments to combat interest.
• You’ll likely be able to move if your new property meets certain criteria.
• You continue to live as an owner in your own home.
• The no negative equity guarantee ensures you won’t repay more than the value of your property.

Cons of lifetime mortgages:

• Some properties aren’t eligible.
• Debt may accumulate quickly due to compounding interest, making repayment costly.
• Early repayment penalties might make it harder to exit the loan early.
• You’ll be unable to pass on your property to your heirs.
• Some means-tested benefits may no longer be available to you. (You might get around this by opting for a drawdown facility).
• There are fees involved in the application procedure.

Pros & Cons of Home Reversions

The pros of a home reversion include that you may be able to release more than you would with a lifetime mortgage.

The cons include that you relinquish all or part ownership of your home⁶. 

Take a closer look.  

Pros of home reversion include:

• You can access funds in either a lump sum, smaller increment payments, or both.
• You get to live in your own house for the rest of your life or until you move to long-term care.
• Some plans do protect against losses caused by early death.
• The equity released on your primary residence is tax-free.
• Equity release plans might assist you in lowering your Inheritance tax burden.
• You can choose only to sell a portion of your property, leaving the remainder to your heirs.

Cons of home reversions are:

• You’re no longer the sole owner of your property.
• Your provider will pay less than market value for the agreed percentage of your property.
• A home reversion plan may affect your income and capital evaluation, ultimately affecting your claim to benefits or local government support.
• The inheritance you leave behind doesn’t include your property and is of significantly less value.
• Significant costs are involved in ending a plan early, as you’ll need to buy back your percentages at the current market value.
• Home reversion schemes are inflexible and you’ll likely require permission to make changes in the occupancy of the property. 

Keep in mind

Various providers have different terms and conditions related to their plans. 

Consulting with a financial advisor or broker is key to ensuring the safety and efficacy of your equity release plan.

Which is the Most Popular Type of Equity Release Plan?

The most popular type of equity release at the moment is a lifetime mortgage plan⁷.

The popularity of lifetime mortgages could be attributed to several factors, including the maintenance of full ownership of your property, flexible interest protection, and repayment schemes.

Just remember

Popularity isn’t always a measure of efficacy. 

Speak to your financial advisor or broker about your thoughts and concerns to ensure you get the right plan for your circumstances.

Things to Consider When Making a Decision

There are a few things to consider when deciding on an equity release plan to ensure you cover every aspect of your unique situation. 

Some of the most common factors include:

• Joint equity
• Current mortgage
• Changes in property value 
• Interest
• Financial Advice

Let’s look into each of these in more detail. 

Joint Equity

If you have a jointly owned property, equity release plans are taken out together. 

This is common practice for elderly homeowners, and a financial adviser will be able to walk you through the process.

Take note

Shared property ownership isn’t the same as joint ownership. 

Where ownership is based on percentage splits, equity release needs to be taken out by both parties against 100% of the property⁸.

Current Mortgage 

You may still be eligible for equity release if you have a current mortgage or secured loan on your property.  

Eligibility for equity release alongside an existing mortgage will be determined based on the value of your property and the amount currently owed.

In this case

You are required to pay off any existing loans or mortgages against your home when accessing equity release⁹.

Changes In Property Value

It’s imperative to consider changes in property value as they may affect your decision to take out equity release. 

While property prices are soaring, equity release could be a good idea. 

You’ll be able to get more attractive interest rates as your loan-to-value ratio rises.

Additionally, suppose the market values of your home increase significantly throughout your loan period. 

In that case, your heirs could benefit from funds left over after the sale once loans and interest have been repaid.

Don’t forget

There is also the possibility of the opposite happening and presenting financial problems down the road.

Interest

The interest charged on an equity release lifetime mortgage varies depending on the lender.

The interest debt is compounded, thereby increasing and adding to the overall amount owed. 

Most people, however, can arrange to make voluntary monthly payments to pay off part or all of the interest. 

Voluntary repayment plans prevent the total debt from increasing over time and imply that less needs to be repaid when the property is sold.

These arrangements prevent the total debt from increasing over time and imply that less needs to be repaid when the property is sold.

Take note

Interest is only levied on lifetime mortgages and not home reversion plans.

Financial Advice

Not only are you required to do so, but it’s in your benefit to seek the guidance of a qualified financial advisor or broker when considering equity release.

They’ll help you understand the stages, advantages and disadvantages, alternatives, and the effects of equity release on your tax and state benefits.

Financial advisors will assist in evaluating your unique situation and help determine the best course of action.

The Synergy of Employee Volunteering and Equity Release

Employee volunteering and equity release institutions can create a powerful synergy that benefits both communities and organizations.

Equity release institutions provide the financial backing needed for charitable initiatives, while employee volunteering amplifies the impact on the ground, leading to more significant and sustainable outcomes.

Common Questions

In Conclusion

Whether a lifetime mortgage or home reversion, equity release plans could be a great way for those in retirement to mobilise equity tied up in their property. 

When traditional alternatives aren’t an option, you can speak to your financial advisor or broker and inquire about any of the equity release schemes regulated by the Equity Release Council.

Your advisor will assist you in determining whether equity release is the best option for your specific circumstances, as well as which of the 2 types of equity release you should consider if it is.