Which types of equity release schemes are right for you?

Happy couple in the garden discussing what is an equity release mortgage

There are many types of equity release schemes available that enable older homeowners to access their property wealth without having to move.

More and more older homeowners are now considering the question of how to manage their retirement finances. For them weighing up the pros and cons of equity release schemes is key to making the right choice.

There are a variety of features that could be available to anyone interested in releasing equity, including the option to make regular interest payments, the option to access the money in stages, or even options where you can guarantee an inheritance to your loved ones

Here, we look at the choices available, explain how each one works and list the pros and cons of each type of equity release product.

There are two main types of equity release schemes:

  • Lifetime mortgages (including lump-sum, drawdown and interest-only, amongst others).
  • Home reversion plans.

Lifetime mortgages are by far the most popular type of equity release scheme, making up the majority of the market. With all lifetime mortgage products you are not obligated to make any payments and will retain 100% ownership of your home. These products have evolved in recent years to offer greater flexibility when releasing equity from the home. As a result, a number of different types of lifetime mortgage products have emerged.

Lump-sum lifetime mortgages

A lump-sum lifetime mortgage is secured against your home and provides you with a tax-free cash lump sum with no required monthly payments. 

As there is no requirement to make payments, you can allow the interest to build-up over time. The mortgage, plus interest, will then only need to be repaid once the last homeowner on the deeds has died or entered permanent long-term care. Typically, this will be achieved with the sale of the home. 

If you wanted to know how much you can release, it is primarily decided by the age of the youngest homeowner, the value of your home, and in some cases your health. To see an estimate of the amount that you could release, use an equity release calculator.

At the Telegraph Media Group, we have partnered with market-leading specialists Responsible Equity Release, to provide you with an equity release service. They will only ever advise on lifetime mortgages from lenders that are members of the Equity Release Council, meaning that they will come with a no-negative-equity guarantee.

Pros

  • You don’t need to make any payments, but can do so if you choose.
  • You can spend the entire amount immediately if needed.
  • The interest rate can be fixed for life, meaning you will know exactly how much you will owe in the future.

Cons

  • The interest will build-up on the mortgage over time.
  • You pay interest on the whole sum released, regardless of whether you use it straight away or not.

Drawdown lifetime mortgages

Drawdown lifetime mortgages work in the same way as lump-sum lifetime mortgages, but with added flexibility. Drawdowns allow you to withdraw money in stages, rather than taking out a single lump sum.

Interest is only applied to the withdrawn portion of the money you release, which can reduce the overall cost of releasing equity. 

Pros 

  • Interest accrues at a much slower pace if you access your money gradually.

Cons

  • 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. With all lifetime mortgages, you can even fix the equity release interest rate for the life of the mortgage so that you don’t have to worry about variable interest rates. With Equity Release Council-approved lenders however, if you do have a variable interest rate, there will be an upper ceiling that it cannot go above. 

Pros 

  • As you are servicing the interest, the overall cost of the borrowing is lower.
  • You will know how much of your home’s value will be left to your beneficiaries.

Cons

  • If you choose a variable interest rate, the repayments will become more expensive if rates rise. Payments can be stopped voluntarily without penalty at any time, however.

Lifetime mortgages can come with many flexible features

Whether you release equity with a lump-sum, drawdown, or interest-only lifetime mortgage, you might be able to make use of the following flexible features:

  • Optional payments - if you’re not planning to commit to clearing the interest each month, then you could choose a product that allows optional repayments, usually of up to 10% of the initial amount released per year.
  • Inheritance guarantees - some lifetime mortgages will allow you to guarantee an inheritance by ring-fencing a portion of your home’s value. This will however reduce the amount of equity that you can release.

Home reversion plans

Home reversion plans make up a much smaller portion of the market compared to lifetime mortgages. 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 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 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

  • 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

  • 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.

Our 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 lack the value for money that you could find with a lifetime mortgage. 

Expert equity release advice

To understand fully how equity release works, and how the different schemes could affect your finances, always seek expert advice. The Telegraph Media Group offers no-obligation consultations with equity release specialists from our partner, Responsible Equity Release.

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 mortgage is right for you, your adviser will help you with every stage of the application process, including the paperwork and the 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 any means-tested benefits. 

Read more:

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.