In the first six months of 2024, UK homeowners released over £1 billion from their property through one of the types of equity release plans available today.¹

Growing numbers of homeowners are choosing to release equity in their property to generate more income as they age—according to Equity Release Council figures, the second quarter of 2024 saw a 12% rise in new client numbers from the first quarter.²

Whether you’re looking for a lump sum or the flexibility to access funds as needed, there are different types of equity release plans designed to suit various needs.

But how do you know which option is right for you?

In this article, we’ll explore the main types of equity release, their key features, and what you need to consider before making your decision.

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 the wealth that’s tied up in your home without having to move out or incur monthly repayments.

Equity release products are regulated by the Equity Release Council³ and allow you access to your wealth as an untaxed lump sum or smaller regular sums.

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. What’s more, lifetime mortgages come in a variety of different subtypes, each of which may be suited to different needs.   

Let’s take a look at an overview of the two types of equity release.

Lifetime Mortgages

Lifetime mortgages represent the most popular type of equity release plan in the UK.⁴

A lifetime mortgage allows homeowners aged 55 and over to borrow against their home’s value while retaining ownership, with the loan and interest typically repaid from the property’s sale when they pass away or move into long-term care.

There are currently five different types of lifetime mortgage on offer.

Let’s take a more detailed look at each.

Lump Sum Lifetime Mortgage

This type of lifetime mortgage allows you to release a single lump sum from your property.

It’s relatively straightforward and gives you access to a large amount of cash upfront, which can be useful for significant expenses or investments.

Important to know

Interest is charged on the full amount from the start, which can lead to a larger loan balance over time.

Drawdown Lifetime Mortgage

This option provides an initial lump sum and a cash reserve that you can draw from as needed.

This flexibility helps minimise interest accumulation, as you only pay interest on the money you have withdrawn, not the entire reserve.

It’s ideal for those who do not need a large sum of money immediately and want to manage their finances more carefully and only make drawdowns when necessary.

Voluntary Payment Lifetime Mortgage

Voluntary payment lifetime mortgages, also known as Voluntary Repayment Plans, allow homeowners to make ad-hoc repayments of interest and/or capital to control the balance of their equity release loan.

While all new lifetime mortgages that conform to Equity Release Council standards must offer the option to make penalty-free partial repayments up to a certain value each year, some providers offer plans that allow larger repayments.

Interest-Only Lifetime Mortgage

With an interest-only lifetime mortgage, you pay the interest on the loan each month, which prevents the loan balance from growing over time.

This type of lifetime mortgage may suit those eager to keep their debt total as low as possible.

Did you know?

Provider Legal & General has recently started offering a Payment- Term Lifetime Mortgage, which is an interest-only plan with a twist: this plan allows homeowners aged 50 and over to release equity from their home while making monthly interest payments for a set term.

How does it work?

With this plan, you make interest payments until you retire or reach the age of 75, whichever comes first. (If you are already retired when taking out the plan, you will make payments until you are 75.)⁵

Once you reach retirement or turn 75, the interest rolls up and the loan is eventually repaid from the sale of the property when you pass away or move into long-term care

Enhanced Lifetime Mortgage

Enhanced lifetime mortgages are tailored for individuals with specific health conditions or lifestyle factors.

These mortgages often offer either higher loan-to-value (LTV) ratios, enabling you to access more substantial funds, or lower rates.

The terms are based on your health, as life-limiting conditions and lifestyle factors can qualify you for an enhanced plan.

You will be required to fill in a health and lifestyle questionnaire to see if you are living with conditions such as heart disease, cancer, diabetes, obesity, and lifestyle choices like smoking or heavy drinking.

In short

These five types of lifetime mortgage may be suited to a variety of needs and retirement goals.

To find out which kind of lifetime mortgage you may want to consider, speak to a qualified equity release advisor.

Now we’ve discussed the first type of equity release, let’s dive into the second: home reversion.

Home Reversion Plans

A home reversion plan lets you access 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.

You can typically sell between 25% and 100% of your property.⁶

How Does Home Reversion Work?

Your home (or part of it) will be sold at between 30% and 60% of its current market value⁷, and you have the option of selling between 25% and 100% of your home.

In return, you receive a lifetime lease, which allows you to continue living in your home until you die or move into long-term care

Essentially, you become a tenant in the home you used to own. 

Are Interest Payments Necessary?

Unlike lifetime mortgages, home reversion plans do not involve interest roll-up or payment.

Why is that?

This type of equity release does not involve paying interest, as it is not a loan but a sale of property equity.

Did you know? 

Some home reversion plans are transferable to other properties, should you choose to move.⁸

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

In other words

The percentage of the property sold remains fixed, and when the property is eventually sold, the proceeds are divided according to the ownership proportions.

Impact on Inheritance

When you die or move into care, the reversion provider sells their share of the property.

The remaining share, if any, goes to your beneficiaries.

Taking out a home reversion plan will affect the inheritance you leave behind, as you will be selling a portion of your home, which is probably your most valuable asset.

Keep in mind

Because you’ve sold at below market value, it also means that you’ll miss out on any potential future rise in property value. 

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—but 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 deed, your age of eligibility, and the matter of interest.

Have a look at each.

Property Ownership

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

By contrast, a home reversion plan requires selling part or all of your home in exchange for equity, which means you will no longer be the sole owner of your home. 

Age of Eligibility

Age affects your eligibility for equity release, and age requirements differ between the two main types. 

Lifetime mortgages are available to homeowners older than 55, whereas you usually have to be 60 to qualify for a home reversion plan.⁹

Interest

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

In fact, the interest on a lifetime mortgage compounds unless you make monthly payments, which means your total debt can increase substantially over time.

Home reversions, on the other hand, involve a sale and not a loan, and therefore interest is not a factor with these schemes.

Learn more about interest on lifetime mortgages here.

What Are the Pros & Cons of the 2 Types of Equity Release?

The two types of equity release each has its 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, and the cons include the effect on your inheritance.¹⁰

Let’s take a closer look. 

Pros of lifetime mortgages include:

• The money is a loan and is therefore untaxed. 
• 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 or your heirs won’t ever owe more than your home eventually sells for.

Cons of lifetime mortgages include (but are not limited to):

• Some properties are usually ineligible, like flats above commercial premises, listed buildings, and houses built using non-standard materials.
• Debt may accumulate quickly owing to compounding interest, significantly increasing the size of the loan.
• Early repayment penalties might make it harder to exit the loan early.
• Unless they are able to repay your lifetime mortgage, you’ll be unable to pass on your property to your heirs.
• Some means-tested benefits may no longer be available to you.
• 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, while the cons include that you relinquish all or part ownership of your home.¹¹

Here’s a closer look.  

Pros of home reversion plans include:

• You don’t have to make any monthly repayments, as the provider recoups their money when the property is sold.
• You can stay in your home for the rest of your life or until you move into long-term care.
• Unlike lifetime mortgages, there is no interest to accumulate over time.
• If you are older or in poor health, you might get a better deal, as the provider expects a shorter term of occupancy.
• Some plans are transferable, allowing you to move to another property if needed.

Cons of home reversion plans include (but are not limited to):

• Selling a portion of your home means less inheritance for your beneficiaries.
• You typically receive less than the market value for the share of your home you sell.
• Receiving a lump sum or regular income can affect your entitlement to means-tested benefits.
• You won’t benefit from any future increase in the value of the portion of the home you sold.
• The terms and conditions can be complex, requiring careful consideration and professional advice.
• You’re no longer the sole owner of your property.
• 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

Providers have different terms and conditions attached to their plans. 

Speaking to a qualified equity release advisor is key to ensuring the safety and suitability of your equity release plan.

Which Is the Most Popular Type of Equity Release Plan?

The most popular type of equity release plan is a lifetime mortgage.¹²

In fact, lifetime mortgages have made up 99% of equity release lending in recent years.¹³

The popularity of lifetime mortgages could be attributed to several factors.

These include:

• Cost: Depending on the value of your home and the length of your plan, selling your home at less than market value may end up costing you more in real terms than the total debt incurred on a lifetime mortgage.¹⁴ Speak to a qualified advisor to find out what the cost of each option could be.
• Ownership: With a lifetime mortgage, you retain full ownership of your home, whereas with a home reversion plan, you sell a portion of your property to the provider.
• Inheritance Protection: Many lifetime mortgages come with features that allow you to protect a portion of your home’s value for inheritance purposes, which is not typically available with home reversion plans.

Just remember

Popularity isn’t necessarily a measure of personal suitability. 

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 and your life partner live in a jointly-owned property, equity release plans are taken out in both names. 

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

When taking out equity release on a jointly-owned property, both homeowners need to meet the provider’s minimum age requirements.

Take note

Shared property ownership isn’t the same as joint ownership.¹⁵ 

Speak to an advisor if you have questions about a shared-ownership property.

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 release.¹⁶

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, if the market value of your home increases significantly throughout your loan period, 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 your home’s value decreasing over time.

Interest

The interest charged on an equity release lifetime mortgage varies depending on the lender and type of loan.

The interest debt is compounded, thereby significantly increasing the overall amount owed over time. 

Note

All new lifetime mortgages approved by the Equity Release Council allow borrowers to make penalty-free partial repayments up to an agreed-upon percentage annually.

Borrowers on older plans may be able to arrange to make voluntary monthly payments to pay off part or all of the interest. 

Voluntary Repayment Plans

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

Take note

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

Financial Advice

It’s to your benefit to seek the guidance of a qualified equity release advisor or broker when considering equity release.

It’s also a requirement for anyone seeking to apply for an equity release plan.

An advisor will help you understand the steps, advantages and disadvantages, and potential effects of equity release.

Financial advisors will assist in evaluating your unique situation, explaining your alternatives, and helping 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 communities and organisations.

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.

Equity Release Trends in the UK

The UK equity release market experienced renewed growth in 2024 after the economic fallout precipitated by the 2022 mini-budget.¹⁷

This renewal may in part be driven by rising property values and an ageing population seeking to supplement their retirement income.¹⁸

Recent trends show a resurgence in the popularity of more flexible drawdown lifetime mortgages, which allow homeowners to access funds as needed rather than in a large lump sum.¹⁹

Another notable trend is the increasing availability of enhanced lifetime mortgages tailored to individuals with specific health conditions or lifestyle factors.²⁰

With competition among lenders intensifying, interest rates remain competitive, and product innovation continues to evolve, offering UK homeowners more personalised and cost-effective equity release solutions than ever before.

Common Questions on Equity Release Types

Types of Equity Release in Short

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 enquire about any 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.