Types of equity release: What are the different equity release schemes?

For the growing number of older homeowners working out how to manage their retirement finances, it’s important to understand the different types of equity release schemes that are available. 

Equity release plans continue to evolve and boast a variety of features, such as the option to make regular payments towards the interest, to access the money in stages, or even to guarantee an inheritance to loved ones.

Here, we outline the different types of equity release and explain how each one works.

The main types of equity release

There are two main types of equity release scheme: lifetime mortgages and home reversion plans. Both enable homeowners aged 55 and over to release cash from their properties and both allow homeowners to stay in their homes until they die or enter long-term care. However, equity release is not for everyone, and there are certain requirements to be eligible:

• The property value needs to be a minimum of £70,000.
• The property must be in good condition.
• You must want to borrow at least £10,000.
• And you must be mortgage-free or able to clear the mortgage. You can use the equity released to achieve this.

The chief difference between the two is that a lifetime mortgage is secured against your property and you retain full home ownership, whereas with a home reversion plan you must sell a share of your home.

1.  Lifetime mortgages

Lifetime mortgages enable homeowners aged 55 and over to borrow against the value of their home, while retaining full ownership. Many lifetime mortgage lenders choose to become a member of the industry body, the Equity Release Council (ERC). The ERC has helped the market to evolve over time, with all lifetime mortgages from lenders that are members offering the following safeguards:

• You retain 100% ownership of your home until you die or go into long-term care.
• You are able to make voluntary payments with no penalty, subject to the lenders criteria.
• You can fix the equity release interest rate for the life of the mortgage.
• All lifetime mortgages will have a no-negative-equity guarantee that ensures you will never owe more than the value of your home.

The lifetime mortgage market has also grown to offer a wider range of product choices, bringing with it an increase in the flexible features that may also be available.

Lump-sum lifetime mortgages

This type of equity release plan is secured against your home and provides you with a single tax-free cash lump sum.

A lump-sum lifetime mortgage offers the advantages of spending the entire payment straight away if necessary, fixing the interest rate for life or making additional payments if you choose. But you should be aware that you pay interest on the whole sum, regardless of when you use the money, and the interest will build up on the mortgage over time.

Drawdown lifetime mortgages

Drawdown lifetime mortgages are also secured against your home but offer the added flexibility of allowing you to withdraw money in stages with 56% of new customers opting for drawdown lifetime mortgages, rather than releasing their equity at once in one lump sum. Interest is only applied to money that is withdrawn, so it can accrue more slowly and may reduce the overall cost of releasing equity. However, because the interest is fixed at the prevailing rate each time you access funds, the rate may differ for subsequent withdrawals.

Interest-only lifetime mortgage features

All lifetime mortgage products come with the option to make voluntary payments. Some homeowners might choose to pay the interest monthly for a time, giving them flexibility to control their retirement budget.

As the payments are voluntary and not required, there are no affordability checks. You could also enjoy the benefit of stopping payments any time, without penalty.  

Additional features

Whichever type of equity release you choose, look out for these flexible features:

Inheritance guarantees – Some lifetime mortgages will allow you to guarantee an inheritance by ring-fencing a portion of your home’s value, although this will reduce the equity that you can release.

Fixed and defined early repayment charges – lifetime mortgages are not suitable for short-term borrowing needs. However, lenders understand that circumstances can change. Therefore, some products will offer fixed repayment charges that reduce on a scale over time, allowing you to know exactly how much it might cost to repay in the future.

Calculate how much you could release with a lifetime mortgage

2. Home reversion plans

With this much less popular type of equity release plan, you sell all or part of your home in exchange for a tax-free cash lump sum or a regular income, with the right to stay in your home – sometimes rent-free – for as long as you choose.

When you die or enter long-term care, your house will be sold, and the reversion company will take its share of the proceeds. If you sold the whole property as part of the plan, all the proceeds go to the company; if you only sold a percentage, it will take its share and the rest will go to your beneficiaries. The main drawback of home reversion plans is that you will not receive market value for the percentage of your home that you do sell.

Telegraph Media Group’s equity release partner, Responsible Equity Release, does not advise on home reversion plans. This is because you do not retain complete ownership of your home and they don’t offer the same value for money as a lifetime mortgage.

Things to consider

Choosing to release equity through any of the available schemes will reduce the value of your estate. An injection of tax-free cash could also affect your entitlement to means-tested benefits. That’s why it’s imperative to receive qualified advice in advance.

Expert equity release advice

To understand fully how equity release works, and how different types of equity release schemes could affect your finances, it is imperative to seek expert advice. The Telegraph Media Group has partnered with market-leading lifetime mortgage specialists Responsible Equity Release to provide you with an equity release service.

Responsible Equity Release can offer you a free, no-obligation consultation with one of their fully qualified advisers. You will be offered tailored equity release advice based on your personal circumstances, with the guarantee that all products offered will meet the highest standards of customer protection.

 If you decide that an equity release plan is right for you, your adviser will help you with every stage of the application process, including the paperwork and the administration.

• Try a free equity release calculator and see how much tax-free cash you could release from your home.

Read more:

• Is borrowing on your mortgage the best way to finance home improvements?
• Mortgages for over-60s?
• Buying a second home

The Telegraph Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,690.

Equity release is only available to homeowners that own a property within the United Kingdom.

The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.

Information correct at date of publication.