Equity release allows homeowners to use the money they have invested in their home without having to move. Whether to cover a pension shortfall or to pay for a single, larger expense, using an equity release scheme is one way to make ends meet without having to leave your home.
There are two main types of equity release, with different benefits and drawbacks.
Lifetime mortgages involve borrowing a percentage of your home’s value, which gets paid back when you pass away or decide to sell your home. Most lifetime mortgages are offered with a fixed-rate interest that ‘rolls up’ over the duration of the loan. This means that debt can build quickly, although the Equity Release Council provides a guarantee that borrowers will never have to repay more than the value of their property.
Lifetime mortgage options include:
- Lump-sum loans. You borrow a lump sum, for which the interest compounds each year until you go into long-term care or pass away.
- Drawdowns. This option allows you to withdraw a smaller amount and draw down more money when you need it. Interest only accumulates on the money you’ve actually borrowed, which can make the overall cost lower.
- Interest repayments. Some lenders will allow you to make interest repayments over the duration of the loan, which can go some way to reduce the final repayment.
There are drawbacks to having a lifetime mortgage, such as losing means-tested benefits. Costs can also escalate quickly, meaning that you may end up leaving little of your property’s value to loved ones after you pass. Most lenders have strict eligibility criteria (such as a minimum age, and minimum loan amounts) which may mean that a lifetime mortgage is not the best option for your circumstances.
Home reversion schemes involve selling a proportion of your home to the lender at lower than market value. You won’t need to leave your home, but when you pass away or move into care, the lender will get the same proportion of the property’s sale price.
Compared to a lifetime mortgage, it can be more difficult to estimate the cost of home reversion, as it ultimately depends on the sale price of your property.
Home reversion schemes will also have stringent eligibility criteria, with schemes only available to those who are 65 or older. Younger borrowers are often required to sell a higher portion of their home, too. For example, some plans will demand 70% of your home’s value for only 20% in advance.
Which equity release scheme is better?
Choosing the most favourable scheme depends entirely on your circumstances, and you should always consult with a regulated, independent advisor before making a decision. If you would like a free initial consultation about equity release options, please get in touch. As a specialist equity release advisor, I can explain each type of equity release and how it relates to your situation, helping you to choose a plan that allows you to comfortably enjoy your retirement.