Equity release: the two types explained

08 January 2021

5 min read

Hannah Smith
Hannah Smith

Personal Finance Journalist

Share

Statistics from the Equity Release Council found that consumers used equity release to access £963m in Q3 2020 from the value of their properties*.

Equity release is not for everyone, and you must take professional advice if it’s something you are considering. As a brief introduction, here’s a guide to the two main ways you can release value from your home without having to sell it and move.

Lifetime mortgages

With a lifetime mortgage, you can borrow against your property while still retaining ownership of your home.

You can make monthly interest payments or let the interest roll up (compound). The loan amount and the interest are only repaid when you and whoever else lives in your home dies or goes into long-term care.

Letting the interest compound can be an expensive way to do equity release, however, because it means the debt mounts up quickly. If you still want to leave some of the value of your home as an inheritance, some products allow you to ring-fence a portion of its worth, or you can make regular or ad hoc payments to reduce your lifetime mortgage.

The industry standard for lifetime mortgages is that they should come with a ‘no negative equity guarantee’, which means that when your property is sold and estate agent and legal fees have been paid, your estate won’t be liable to pay any more even if your house has fallen in value and there’s not enough left in the pot to repay the whole loan to the provider.

Who can apply for a lifetime mortgage?

Lifetime mortgages are usually only available to over-55s, and typically you will only be able to borrow up to a maximum loan-to-value. The younger you are, the lower loan-to-value you will get. At the time of writing, the average LTV maximum across all lifetime mortgage products was 48%, according to Moneyfacts**.

The interest rate you’ll get typically won’t be as competitive as the rate you might get on a standard remortgage, but older borrowers may struggle to get approved for additional standard mortgage borrowing.

Pros of a lifetime mortgage:

  • You still own your home and can stay in it
  • You can still benefit from any property price rises
  • You can get a one-off lump sum, or smaller amounts as you need them, or a regular income
  • You can choose not to make monthly repayments
  • You can take a lifetime mortgage out from age 55
  • ‘No negative equity’ guarantee.

Cons:

  • Interest builds up quickly if you roll it up, which can be expensive
  • Can affect your tax position and entitlement to state benefits
  • There may be early repayment charges if you pay back the mortgage early
  • You may have to pay an arrangement fee, solicitors fees and survey fees
  • The value of your estate is reduced.

Home reversion plans

When you choose a home reversion plan, you sell all or part of your house to an equity release provider in exchange for a tax-free lump sum or regular payments.

You get a lifetime lease so you can remain living in the property rent-free until you die, but you are still responsible for maintenance and insurance in the same way as before.

You can ring-fence part of your property so you can still leave this as an inheritance.

An important downside of home reversion plans is that typically you won’t get full market value for the part of your home you choose to sell.

The Money Advice Service* estimates consumers normally receive between 20% and 60% of the market value of their properties when they choose this form of equity release.

Some providers will let you buy back the share in your property that you’ve sold, but you’ll usually pay full market value for this, much more than what you sold it for.

The minimum age for home reversion varies by provider, but some will want you to be 65 years old to apply.

Pros of home reversion plans:

  • You can remain living in your home rent-free
  • You can get a tax-free lump sum or regular income
  • You could get more money than if you took out a lifetime mortgage
  • You may be able to buy back the share of your property you have sold.

Cons:

  • You no longer own your home (or at least part of it)
  • You’ll likely sell it for much less than market rate
  • If you buy back the share you have sold, you’ll usually pay full market rate
  • The value of your estate is reduced
  • You’re still responsible for insurance and maintenance
  • You may have to pay an arrangement fee, solicitors fees and survey fees
  • Can affect your tax position and entitlement to state benefits
  • The minimum age to apply is usually 65.

As you can see, lifetime mortgages and home reversion plans each come with benefits and potential downsides, and what works for one homeowner won’t always be right for another. If you’re considering equity release, don’t rush as it can affect your entitlement to means-tested benefits and reduce the value of your estate. Do your research, and take professional financial advice to be sure you’re making the right choice.

*Equity Release Council Q3 2020 market statistics

** Moneyfacts: Equity release rates lower now than at the start of 2020

Biography

Hannah Smith is a freelance financial journalist with a background in the trade press. She writes about personal finance, asset management and business for titles including Money Observer, Shares, FE Trustnet and MoneyWeek.