Types of Equity Release & How They Differ in 2022

Your Go-To Guide on the Best Lifetime Mortgage Options on the Market
Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui
Have you considered the financial advantages of equity release? There are a number of types and options of equity release lifetime mortgages to suit your needs

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Don’t be put off by the many types of equity release plans out there in 2022!

If you’re one of the 35% of UK retirees with less than £10,000 in your pension fund, or you’re looking for a means for financial freedom.

Equity release could be the answer you’ve been looking for.

With so many types of equity release to consider, it’s challenging to know which one is right for you.

But knowledge is power, and the first step is to understand the types of plans available. That’s exactly what this article does.

By reading through the information provided, you can discover:

  • The 2 main types of equity release available in 2022.
  • The options available within these plans.
  • Whether or not equity release will help you achieve financial freedom.

Our editorial team has combed to the market to find the most important information on equity release types.

Let’s find out now!

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TABLE OF CONTENTS

What’s Equity Release & How Does It Work?

Equity release is a financial arrangement that provides homeowners over 55 with funds derived from their property’s value while enabling them to continue using it.

Simply put, it’s a way to release equity from your house while you still live in it.

Before you continue reading, be sure to check out this video that sums up equity release:

Different Schemes Quick Summary

Types of Equity Release

Lifetime MortgageHome Reversion Schemes

Types of Lifetime Mortgages

Drawdown Lifetime MortgagesLump Sum Lifetime Mortgages
Enhanced Lifetime MortgagesIncome Lifetime Mortgages
Buy-to-Let Lifetime MortgagesSecond Home Lifetime Mortgages

What Are the 2 Main Types of Equity Release In 2022?

The 2 main types of equity release available in the UK are a lifetime mortgage and a home reversion scheme. Both options allow you to unlock the cash tied into your estate.

However, there are some key differences.

For example, while you retain 100% ownership from your home with a lifetime mortgage, you sell all or a percentage of your property with a home reversion scheme.

What’s a Lifetime Mortgage?

A lifetime mortgage is a loan for over 55s secured against your primary residence, while you still retain 100% property ownership.

Interest and partial loan requirements are an option, but there’s no compulsory repayments necessary in your lifetime.

Instead, the loan and compound interest1 are covered from the sale of your home when you pass away or move to long-term care.

Lifetime mortgages can be unlocked by individuals or couples, ensuring that both homeowners have the same access to the plan’s benefits.

What’s a Home Reversion Plan?

A home reversion scheme is the second most popular type of equity release.

In this case, you’ll sell all or part of your property below its market value in exchange for a tax-free lump sum, a regular income, or a combination of both.

Furthermore, you can stay in your home rent-free with a home reversion plan, until you pass away or enter long-term care.

6 Features of a Lifetime Mortgage

A lifetime mortgage has some fantastic features that can be highly beneficial to aid you through retirement.

These features are all implemented by the Equity Release Council to protect consumers.

  • Fixed or Variable Interest Rates Most lifetime mortgage plans have fixed interest rates and if they are variable, they will be capped. Interest rates were at an all-time low in March 2021, but are slightly climbing. Therefore, now’s the best time to unlock the equity tied into your property.
  • Retain Ownership of Your Home – Despite using the cash in your property, you’ll still retain 100% ownership. As such, if you pay off your equity release loan, the property2 is still yours, and you can live there for the rest of your life.
  • Loan and Interest Repayments are Optional While you have the option to repay the monthly interest and up to 10% of the loan annually, there’s no obligation to do so. You can stop and start the repayments whenever you wish and these payments will reduce the overall cost of the loan.
  • No Negative Equity Guarantee All lifetime mortgage come with this guarantee. It’s designed to ensure that that your loan won’t go into negative equity. So, if you’re overall loan amount and compound interest calculates to more than the value of your home, that balance is written off.
  • Downsizing Protection – If you decide to move to a smaller home, you can pay off your lifetime mortgage in advance without incurring early repayment charges.
  • Inheritance Protection Homeowners have the option of setting aside a portion of your property to be left as a guaranteed inheritance for your heirs.

How Much Equity Can You Release Using a Lifetime Mortgage?

With a lifetime mortgage, you can unlock anything from 29.5% and 65% of your property value, depending on your age, your property value, and the condition of your health.

Try our accurate lifetime mortgage calculator to discover the maximum amount that you could be eligible to release.

Examples of Lifetime Mortgages on a £200,000 House:

 AgePerfect HealthThe amount you can loan if you're in good healthMedically EnhancedAllows you to borrow more money or reduce the interest rate charged, if you have poor health.
55£59,000
(£200,000 x 29.5%)
£87,200
(£200,000 x 43.6%)
60£72,400
(£200,000 x 36.2%)
£99,000
(£200,000 x 49.5%)
70£93,000
(£200,000 x 46.5%)
£109,000
(£200,000 x 54.5%)
80£114,000
(£200,000 x 57.0%)
£114,200
(£200,000 x 57.1%)
90£118,600
(£200,000 x 59.3%)
£115,800
(£200,000 x 57.9%)

Custom Equity Release Plan Options

The equity release plan options are drawdown plans, enhanced plans, lump sum plans, and income plans.

Let’s unpack what these are!

Drawdown Plans

drawdown equity release plan allows homeowners to put a the equity in their property into a cash facility, only to unlock portions of the funds whenever needed.

What’s great about this option is that you’ll only pay interest on the money you unlock.

You can also opt for an initial lump sum combined with a drawdown facility.

Lump Sum Plans

With a lump sum equity release plan, you can unlock your cash in one go, which is best if you want to use your cash for a big-ticket item.

It’s important to opt for a lump sum with extra caution to ensure you don’t run out of equity at a later stage.

Enhanced Plans

Enhanced equity release plans are designed for older homeowners with medical or lifestyle concerns.

By qualifying for one of these plans, you’ll receive optimal interest rates and a greater percentage of equity.

Examples of health conditions include heart problems, high blood pressure, and with lifestyle choices, it can include heavy smoking or drinking

Income Plans

With an income equity release plan, you can receive a monthly tax-free salary for up to 25 years.

This option is ideal for those looking to use their equity release to supplement monthly retirement income.

What Are Some of the Downsides of Equity Release?

The downsides of equity release products include reducing your inheritance.

Further pitfalls to help you determine if equity release is a good idea:

  • There are costs involved.
  • The interest can compound quickly.
  • Your family may not inherit their childhood home.
  • You won’t be able to take out further loans against your property.

What Are the Benefits of Equity Release?

The main benefit of equity release is that you get to live in your home, rent-free, for the rest of your life, without having to worry about monthly loan or interest repayments.

Further equity release benefits to help you determine if equity release is a good idea include:

  • 100% Ownership – Your house can remain yours (if you opt for a lifetime mortgage, and you can continue to live in it throughout your life, or until you need to go into a long-term care home.
  • Tax-Free Cash – You will get a lump sum of money to spend however you want, or a regular salary.
  • Inheritance Protection – If you would like the inheritance money for your family to be left untouched, you will have options to guarantee its safety. These will impact the amount you can borrow.
  • Equity Release Council – You are protected by the Equity Release Council3. This body regulates the industry, including stipulating a ‘no negative equity’ clause. This means that your family will never pay more for your home than the value of your home upon selling, even if property prices plummet.

Equity Release Differences Table

Here’s a summary for ease of reference.

 Home Reversion SchemeA scheme that allows you to sell all or part of your property below its market value in exchange for a tax-free lump sum, a regular income, or a combination of both.Lifetime MortgageA loan for over 55s secured against your primary residence, while you still retain 100% property ownership.
You will retain 100% ownership of your property.NoYes
The lender will have a registered charge on your home.N/A as you’ll be selling all or part of your property.Yes – this will work the same as with a traditional mortgage.
The maximum amount of equity that you can unlock.This will be based on your age and the value of your property.This will be based on your age and the value of your property.
You’ll need to undergo an affordability check.NoNo
You’ll need to cover mandatory monthly repayments.NoNo
You can opt for voluntary repayments.Depends on the plan and lender.Usually, yes
The minimum age of the youngest applicant.Usually 60Usually 55
The age maximum to qualify for the plan.Usually non, but may differ from one lender to the next.Usually non, but may differ from one lender to the next.
You’ll have the opportunity to live in your home for the rest of your life.YesYes
The loan comes with fixed interest rates.N/A as you’re selling all or part of your property in exchange for equity.Usually, yes
You have the option to move home if you wish.NoYes
The loan comes with downsizing protectionNoYes
The loan comes with a significant life event exemption.NoYes

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What’s a Shared Appreciation Mortgage (SAM)?

A Shared Appreciation Mortgages was a method to help homeowners unlock the equity in their property without having to make monthly payments that existed between 1996 and 1998.

You would never have to make a monthly payment of interest until the property was sold or the borrower died.

The bank would then be entitled to the total of the initial loan plus up to 3x the increase in property value when the property was subsequently sold. You’d end up owing the bank a hefty amount.

Despite its absence for over 20 years, the Shared Appreciation Mortgage continues to be a highly disputed type of equity release, and still impacts the industry’s reputation to this day.

Are Retirement Interest-Only Mortgages (RIO’s) a Type of Equity Release?

Retirement Interest Only Mortgages (RIO’s) is a type of later-life mortgage that doesn’t fall under the equity release umbrella.

Like equity release, the loan is paid off when you die.

However, you will be obligated to make monthly interest repayments with a retirement interest-only mortgage.

Financial Advisers & Lenders

The first thing you need to do is select your financial adviser.

You’ll be working with this person for the rest of your life, so make sure it’s someone you trust.

After that, your financial adviser will help advise on the best lenders for your circumstances.

It would be best if you met with a few lenders who offer different plans before settling on your final selection.

Top Tip: You MUST use a lender who is a member of the Equity Release Council!

What’s a Home Income Plan & How Does It Work with Equity Release?

If you’re retired, and your pension or savings will not suffice, then you should seriously consider a home reversion plan.

These products work that when you release equity through a lifetime mortgage or a home reversion plan, the money is invested in an annuity built into the plan.

A lump sum goes in and what comes out is a monthly salary to set you for life.

With a home income plan, the salary you get will depend on 3 things:

  • Prevailing annuity rates
  • Your gender
  • Your age

It’s vital to consult with a professional financial adviser before considering a home income plan as, like all financial products, there are risks involved.

6 Pros of a Home Income Plan

  • You’ll receive income from your annuity for as long as you live, no matter what age that is.
  • You can request to increase your income annually.
  • Home income plan annuities will often give you a more considerable income than what you’d get with a standalone annuity.
  • Depending on your circumstances, you may have a lump sum available in addition to your annuity income.
  • As you get older, the more income you’ll be eligible to receive.
  • The interest on your plan is repaid automatically from the unlocked funds, which means your home value won’t deplete as much as with alternative types of equity release.

5 Cons of a Home Income Plan

  • You cannot undo the annuity process once you’ve committed.
  • If you were to die early during the terms of your income plan, then your family could lose out. Look out for plans that offer fund protection.
  • Downsizing might be a better option to consider as long-term borrowing can work out expensive from an interest perspective.
  • Your home income plan might impact your tax position and benefits entitlement.

So, What Is the Best Type of Equity Release Plan?

The best equity release plan depends on your circumstances and needs, but the most commonly selected option is a lifetime mortgage.

All plans are safe, as long is you proceed with caution and work with members of the Equity Release Council.

Got Questions? Check These First

Is There More Than One Type of Equity Release?

What's The Best Type of Equity Release?

Conclusion

Equity release is a financial product that allows you greater flexibility and freedom in the latter stages of your life.

With so many options available to you in 2022, it’s best to speak to your financial adviser.

They’ll help you determine the best cause of action, talk you through all the different types of equity release plans and the various alternatives.

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Editorial Note: This content has been independently collected by the SovereignBoss advisor team and is offered on a non-advised basis. Sovereignboss may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.

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