Don’t be put off by the many equity release options out there in Dec 2021!
Like many over 55s, you’re likely considering equity release as a way to give you a financially free retirement. With so many plans on the market, there are endless choices to consider. We’re sure that you’re asking: what are the equity release options?
By reading through this article, you can discover:
- The 2 main types of equity release available in Dec 2021.
- The options available within these plans.
- Whether or not equity release will help you achieve financial freedom.
Let’s get started!
What’s Equity Release & How Does It Work?
Equity release is a financial arrangement that provides the owner of a house or property with funds derived from the value of the property, 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.
Learn More: How Does Equity Release On Your House Work?
Before you continue reading, be sure to check out this video that sums up equity release:
What Are the 2 Main Types of Equity Release In Dec 2021?
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. You retain 100% ownership from your home with a lifetime mortgage, whereas you sell a percentage of your property with a home reversion scheme.
Let’s take a look!
What’s a Lifetime Mortgage?
A lifetime mortgage is a loan secured against your primary residence if you’re 55 or older, while still retaining 100% ownership. When the last borrower dies or moves into long-term care, the loan, plus interest, is usually paid off from the sale of the home.
DISCOVER: What’ a Lifetime Mortgage in the UK?
What’s a Home Reversion Plan?
A home reversion scheme is the second most popular type of equity release. You sell all or part of your property at less than its market value in return for a tax-free lump sum, a regular income, or a combination of both. Furthermore, you can stay in your home rent-free until you pass away or enter long-term care.
Learn more: Home Reversion Schemes
3 Essential Points to Consider With a Home Reversion Scheme
You must consider these 3 essential points if you’re considering a Home Reversion Scheme:
- You’ll no longer be the owner of your home.
- If you withdraw from the plan early, you’ll have to repurchase the share at its full market value; this may be far more than the total amount you originally paid for it.
- You’ll only receive a percentage of the value of the portion of the home that is sold.
Some individuals may not need the flexibility that a home reversion plan provides. If your circumstances change, it may not be portable from one house to another.
Learn More: Benefits of a Home Reversion Scheme
Now, let’s continue to unpack the complicated world that is the lifetime mortgage.
Lump-Sum & Initial Advance With Reserve Facility (Drawdown Lifetime Mortgage)
With lump-sum lifetime mortgages, you get the cash all at once. With drawdown plans, you may get an advance for the money you need immediately while maintaining a pre-agreed reserve fund that you can draw on as needed.
A drawdown plan is similar to a savings account in that you can deposit funds and withdraw them later, and you’ll only pay interest on the money you unlock.
The amount kept in reserve will not earn any interest, which may save you thousands of pounds in interest payments.
A lump-sum lifetime mortgage is typically recommended if you plan to spend all the money within the next couple of years. However, if you want money for life, a drawdown is the better option.
Let’s Look at an Example of a Drawdown Equity Release Plan
Lisa wants to live on her property for the rest of her life, but would like to add some renovations in the next few years.
Initially, Lisa thought about taking out £80,000 to cover the remodeling expenses for her dream home, but her adviser recommended otherwise.
What’s the solution?
A lifetime mortgage that offers £30,000, that has a reserve facility of £50,000 for later use. Lisa will have a fixed interest rate of 4%. However, she won’t be paying pointless interest while her money sits idly in her bank account.
She’ll save a ton of money in the long run.
7 Features of a Lifetime Mortgage
A lifetime mortgage has some fantastic features that can be highly beneficial to aid you through retirement.
Interest Rates for Lifetime Mortgages May Be Fixed or Variable
Variable rates are also available; they may begin at a lower price but could climb over time. Per the Equity Release Council rules, there is a maximum or upper limit on variable plans.
You will know exactly how interest is accumulating on a loan. The interest rates might be somewhat greater than a residential mortgage, but you won’t have to worry about having your rate re-set. For the duration of the lifetime mortgage, whether it’s one year or 50 years, it will stay constant!
With a Lifetime Mortgage, You Will Always Own Your Home
You’ll always be the owner of your house with a lifetime mortgage. The charge imposed by your equity release lender will be similar to that of a residential loan.
The most significant difference between a home reversion plan and a lifetime mortgage is retaining your homeownership with a lifetime mortgage. The biggest misconception about equity release is that you lose it with all options.
As your lender will require it, you will have to pay off any outstanding mortgage or secured loan before the sale can go through.
No Monthly Payments or Choosing to Pay the Interest
You will not be required to make any monthly payments if you take out a lifetime mortgage. Any payments that you choose to make will be entirely optional. You can opt for a plan where some capital and interest repayments are accepted.
At the end of the first year of your lifetime mortgage, the interest will be calculated and added to the total sum borrowed. The interest will also be determined at the end of the following year and added, and so it will continue to compound.
If you don’t want to make any monthly payments, a ‘roll-up’ lifetime mortgage is likely your best option. On the other hand, if you want to prevent the interest from accumulating as possible, you may choose to pay it off monthly. Making voluntary contributions allows you to leave more money for your beneficiaries.
You will be able to keep your standard of living without being committed to monthly payments if you choose to release funds from your home.
What’s more, if you’re not eligible for other forms of finance because you don’t meet the requirements for borrowing money, you won’t have to worry about a credit check with equity release.
No Negative Equity Guarantee
A ‘no negative equity guarantee‘ is included in all lifetime mortgages that meet the Equity Release Council’s criteria. Simply put, it means that you will never owe more than the property is worth when it is sold.
When you take out an equity release plan, you continue to own your home and will be able to live in it until you pass away or enter long-term care. The equity release is paid back when your property is sold, and any remaining money goes to your beneficiaries.
If the value of your home has decreased significantly, it’s possible that there isn’t enough cash from the sale to pay off the equity release. If this happens, the lender would be able to ask for the most amount permitted by law: the selling price minus any associated costs of marketing.
A ‘no negative equity guarantee’ means that the lender will waive the remaining loan balance, and no debt will be transferred to your beneficiaries if you pass away before paying off the loan.
When you have a lifetime mortgage and want to downsize, you may find yourself in a position where you must choose between upgrading your property or paying off the equity release. If you wish to redeem your equity release, you can either port the lifelong mortgage to your new home or pay off the equity release. You’ll be expected to cover an early repayment charge.
Downsizing protection ensures that any possible ERC is waived if you sell your home to buy another property, which will become your primary residence.
Different lenders have various downsizing protection terms. Some will only allow you to pay back without incurring an ERC if the new property is not one that they will accept. Others will allow you to pay back without incurring an ERC when you sell your home.
If you have an equity release, check out our article on how to move home.
Using Equity Release to Help Purchase a New Home
When buying a new property, lifetime mortgages have grown in popularity. They’re useful if you don’t have the money to qualify for a regular mortgage. Assume you’re relocating to an area where the housing market is more expensive or that your current home has a large mortgage outstanding. A lifelong loan could be a wonderful alternative for you in that situation.
The property sale, mortgage repayment, and the purchasing of your new property will all be finalised at the same time. You can get a down payment for your new home by selling your current property and taking the equity out of the new house. Furthermore, this is without having to make any monthly payments if you don’t want to.
Inheritance Protection – How to Protect Your Beneficiaries
If you want to provide a certain inheritance for your heirs, a lifetime mortgage with inheritance protection may be an excellent option for you. The inheritance protection will serve as a safeguard to ensure that enough money is available for your beneficiaries once the lifetime mortgage has been paid off.
The most popular inheritance insurance alternative allows you to safeguard a portion of your house so that a part of the property will always be there for your beneficiaries. The protected amount of your property’s value will be set aside for your heirs when you pass away or enter long-term care.
Because of the inheritance protection, lifetime mortgages on inherited property are frequently more costly and allow for a smaller release amount.
How Much Equity Can You Release Using a Lifetime Mortgage?
With a lifetime mortgage, you can unlock anything from 29.5% and 59.3%, 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 stand to release.
Examples of Lifetime Mortgages on a £200,000 House:
- Perfect Health – The maximum equity release is £59,000 (£200,000 x 29.5%)
- Medically Enhanced – The maximum equity release is £87,200 (£200,000 x 43.6%)
- Perfect Health: The maximum equity release is £72,400 (£200,000 x 36.2%)
- Medically Enhanced: The maximum equity release is £99,000 (£200,000 x 49.5%)
- Perfect Health: The maximum equity release is £93,000 (£200,000 x 46.5%)
- Medically Enhanced: The maximum equity release is £109,000 (£200,000 x 54.5%)
- Perfect Health: The maximum equity release is £114,000 (£200,000 x 57.0%)
- Medically Enhanced: The maximum equity release is £114,200 (£200,000 x 57.1%)
- Perfect Health: The maximum equity release is £118,600 (£200,000 x 59.3%)
- Medically Enhanced: The maximum equity release is £115,800 (£200,000 x 57.9%)
What Are Some of the Downsides of a Lifetime Mortgage?
The downsides of a lifetime mortgage, include compound interest if you don’t make any interest repayments, you’ll leave your kids a smaller inheritance, and your eligibility for means-tested benefits might be impacted. They are considered savings, and one must comply with government savings limits to keep your entitlements to your benefits.
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.
Which Is the Best Type of Equity Release Plan?
The best type of equity release plan depends on your circumstances and needs, but the most commonly selected option is a lifetime mortgage. To discover which type of equity release (or alternative) is ideal for you, you must get in touch with a whole-market financial adviser. Always use a lender who’s a member of the Equity Release Council.
Furthermore, consider these factors:
- The value of your property.
- The type of property you posses and the construction methods used.
- Your age, or the age of the youngest homeowner.
- Your current financial needs.
- The money you might need in the future.
- The condition of your health and any lifestyle challenges that you face.
Interesting read: Equity Release Alternative
Equity Release Differences Table
Here’s a fantastic table to help you clearly see the differences between a lifetime mortgage and a home reversion scheme:
|Home Reversion Scheme||Lifetime Mortgage|
|You will retain 100% ownership of your property.||No||Yes|
|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.||No||No|
|You’ll need to cover mandatory monthly repayments.||No||No|
|You can opt for voluntary repayments.||Depends on the plan and lender.||Usually, yes|
|The age minimum of the youngest applicant.||Usually 60||Usually 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.||Yes||Yes|
|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.||No||Yes|
|The loan comes with downsizing protection||No||Yes|
|The loan comes with a significant life event exemption.||No||Yes|
Are Retirement Interest-Only Mortgages (RIO’s) A Type of Equity Release?
Retirement Interest Only Mortgages (RIO’s) is a type of a later-life mortgage, but doesn’t fall under the equity release umbrella.
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.
- 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 Council. 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.
Learn More: Equity Release Benefits You Must Know
What Are the Equity Release Plan Options?
The equity release plan options are drawdown plans, enhanced plans, protected plans, and combined plans.
Let’s unpack what these are!
1. Drawdown Plans
A drawdown plan lifetime mortgage operates in a similar way to other lifetime mortgage plans. However, you are offered more freedom with a drawdown plan.
A drawdown plan gives you the flexibility and freedom to take out cash from your home when and as you like. After taking out your lump sum, the plan allows you to ‘draw down’ additional money in stages whenever you want. Many consider this a flexible option and it can significantly assist in planning your finances and financial future. You only need to pay interest on the amount you borrow and not the full reserve.
2. Enhanced Plans
An enhanced plan is an option for you or your partner to consider if you have any pre-existing health or lifestyle conditions, which will allow you to release more money from your home.
Heart problems, high blood pressure, and diabetes are typically the health conditions that qualify one for an enhanced equity release plan. By lifestyle choices, this may refer to things such as heavy smoking. It is crucial to pick an adviser who will advise you on this as you may miss out on thousands.
3. Protected Plans
A protected plan offers you the possibility to secure and guarantee an inheritance for your loved ones.
Let’s say a couple can release £50,000 but would like to leave an inheritance for their grandchildren. They could take £30,000 from that amount, leaving 40% of their property ‘protected’ for them.
An alternative to this would be releasing equity for an early inheritance.
4. Combined Plans
Combined plans give you the option to take out an equity release plan with your partner. This means that they will be able to continue to live in your home until they pass away or move into permanent care, even if you pass away first.
This could be of great comfort and definitely something to discuss with your financial adviser.
Numerous Financial Advisers and 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!
Got Questions? Check These First
Is There More Than One Type of Equity Release?
There is more than one type of equity release. The most common types are lifetime mortgages and home reversion schemes.
What's The Best Type of Equity Release?
The best type of equity release depends on individual needs. However, the most common type of equity release is a lifetime mortgage.
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 Dec 2021, it’s best to speak to your financial adviser. They’ll help you find all the best options available for you.
Want to know how much you could release? Try our release equity calculator.