Some equity release mortgage plans offer the flexibility to make regular interest payments, some allow you to access the money in stages, and others allow you to pass on a guaranteed inheritance. Each of the products have pros and cons which need to be considered. Here, we look at the different plans available for older homeowners and how they work.
There are two main types of equity release mortgage plans:
- Lifetime mortgages
- Home reversion plan
This article will discuss the following variations:
- Lifetime mortgages
- Drawdown lifetime mortgages
- Interest-only lifetime mortgages
- Interest-only flexible lifetime mortgages
- Protected lifetime mortgages
- Home Reversion Plans
Lifetime mortgages are by far the most popular type of equity release mortgage , making up more than 99 per cent of the market. These products have evolved in recent years to offer you much greater flexibility in the way you access your money and make repayments. As a result a number of different types of lifetime mortgage products have emerged.
A standard lifetime mortgage is secured against your home and provides you with a tax-free cash lump sum with no required monthly payments. With this type of equity release mortgage you retain 100% homeownership of the property from which you are releasing equity.
Compound interest is added throughout your lifetime and, once the last deed-holder passes away or enters long-term care, the mortgage plus interest is repaid - typically through the sale of the property. You can typically release 18–50 pct of your home’s value, with the maximum amount determined by a variety of factors including your age, health, and property value.
All lifetime mortgages approved by the Equity Release Council come with a no-negative-equity guarantee, which means you will never owe more than the value of your property and cannot pass on any lifetime mortgage debt to your family or estate.
Pros of a standard lifetime mortgage
- There are no required monthly payments
- You can spend the entire amount immediately if needed
Cons of a standard lifetime mortgage
- Interest can build up quickly
- You pay interest on the whole sum, regardless of whether you use it straight away or not
Drawdown lifetime mortgages
Drawdown lifetime mortgages work in the same way as standard lifetime mortgages, but with added flexibility. Drawdowns allow you to withdraw money in stages, rather than taking out a singular lump sum. You can even choose to receive regular payments.
Interest is only applied to the withdrawn portion of the money you release, which can reduce the overall cost. You retain 100 pc ownership of your property, as with a standard lifetime mortgage.
Pros of a drawdown lifetime mortgage
- Interest grows at a much slower pace if you access your money gradually
- The money remains tax-free, even if you take out smaller sums over time
Cons of a drawdown lifetime mortgage
The interest rate is only fixed on the initial lump sum, and the amount you draw down is charged at whatever the interest rate is at that time
Interest-only lifetime mortgages
These products allow you to make monthly interest payments to help keep the overall cost of the mortgage down. You can even fix the interest rate for the life of the equity release mortgage so that you don’t have to worry about variable interest rates.
Pros of an interest-only lifetime mortgage
- The overall cost of the borrowing is lower
- You’ll know how much of your home’s value will be left to your beneficiaries
Cons of an interest-only lifetime mortgage
- You must have sufficient income to maintain regular interest repayments
- If you choose a variable interest rate, the repayments will become more expensive if rates rise
Interest-only flexible lifetime mortgages
This type of equity release mortgage offers greater repayment flexibility. If you want to make regular payments each month, you can make full or partial payments towards the interest amount.
If you decide you no longer want to make payments, the product switches to a standard lifetime mortgage where the interest rolls up instead.
Pros of an Interest-only flexible lifetime mortgage
- You can reduce or end your payments in the future if your income falls
Cons of an Interest-only flexible lifetime mortgage
- There may be additional administration costs to switch to a standard lifetime mortgage
Enhanced lifetime mortgages
Enhanced lifetime mortgages are designed for those with medical conditions, and enable you to release more money compared to what would be available with a standard lifetime mortgage. If you have health problems, such as diabetes or high blood pressure, or you’re a smoker, you may qualify for an enhanced plan.
Pros of an enhanced lifetime mortgage
- You can release more, with a higher possible loan-to-value
- You could qualify based on past or present ill health
Cons of an enhanced lifetime mortgage
- By borrowing more, you will further reduce the value of your estate
- If you live longer than expected, the interest may grow quickly
Protected lifetime mortgages
Protected lifetime mortgages allow you to guarantee an inheritance for your beneficiaries by protecting a percentage of the value of your property. However, by ring-fencing some of the value of your home, you reduce the amount of equity available for you to release. If you ring-fence 20 pc, for example, your mortgage amount will typically fall by the same percentage.
Pros of a Protected lifetime mortgage
- Peace of mind that your beneficiaries will receive an inheritance
Cons of a Protected lifetime mortgage
- You can release less equity from your property
Home reversion plans
Home reversion plans are now far less common than lifetime mortgages, accounting for less than one per cent of the market. With a home reversion 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 – rent free – for as long as you choose.
When you pass away 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, all of the proceeds will go to the company; if you only sold a percentage, they will take this and the rest will go to your beneficiaries.
Pros of a home reversion plan
- You can take the money as a lump sum, regular payments, or a mixture of both
- You can protect some of the value of your home to pass to your beneficiaries
Cons of a home reversion plan
- You will receive significantly less than the market value for your property – usually between 20 and 60 per cent of its true value
- These plans offer poor value if you die shortly after taking one out
Expert equity release advice
To fully understand the different types of equity release mortgage plans available, and how these could affect your finances, always speak to an expert adviser. The Telegraph Equity Release Service offers no-obligation consultations with equity-release specialists from our partner, Responsible Life.
Each equity release adviser will offer tailored advice based on your personal circumstances, with the guarantee that all products offered meet the highest standards of customer protection. If you decide that an equity release mortgage is right for you, our adviser will handle the application process including all of the paperwork and administration. It is always important to seek professional advice when considering releasing equity from your home as this could affect the value of your estate and your entitlement to means-tested benefits.
- Try our free equity release calculator and see how much tax-free cash you could release from your 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 £1,490.
If you would like more information on equity release and how it could help you, simply call 0800 0291087 to request a guide or to arrange your free consultation. Lines are open between 9am – 8pm Monday to Friday and 9am – 5pm on Saturday.
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.