Types of Equity Release Options and Considerations

There are several types of equity release options available, each with its own set of benefits and drawbacks. Home reversion plans allow homeowners to sell a portion of their property to a provider in exchange for a lump sum or regular payments.

A key consideration is the impact on inheritance tax, as equity release can affect the amount of inheritance tax paid by beneficiaries. It's essential to understand how equity release will be treated for tax purposes.

Lifetime mortgages are another popular option, which allow homeowners to borrow money using the value of their home as security, without having to sell their property. This type of equity release can be a good option for those who want to retain ownership of their home.

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Lifetime mortgages can offer advantages, but there are some risks to be aware of. Comparing both sides can help you decide if this path is right for you.

You can continue living in the home for as long as you like, with no monthly payments required toward the loan. This flexibility is a major benefit for many people.

Lifetime mortgages allow you to withdraw equity tax-free while giving you the flexibility to use the money as you see fit. This can be a huge relief for those who need a lump sum.

Your lender may allow portability, meaning that if you move to a different property you can take your lifetime mortgage with you. This is a great option for those who plan to move in the future.

There's no fixed or set term in which you need to repay the amount borrowed. This means you can enjoy your home without worrying about a deadline.

However, lifetime mortgages can be more expensive than a standard mortgage, with interest added on to the amount you owe. This can quickly lead to a large debt.

You'll still have to maintain and insure your home, even if you no longer own it. This can be a significant responsibility.

Tax and inheritance, or some benefits may be affected by a lifetime mortgage. This is something to consider carefully before making a decision.

It's essential to get advice from an independent financial adviser (IFA) who specialises in equity release. They can help you understand the benefits and drawbacks and make an informed decision.

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One of the biggest advantages of a lifetime mortgage is that you can continue living in your home for as long as you like, with no monthly payments required toward the loan.

You can withdraw equity tax-free, giving you the flexibility to use the money as you see fit. This means you can spend it on repairs, improvements, or adaptations to your home, pay for care or support services, supplement your income, or pay off outstanding debts.

A lifetime mortgage allows you to receive the money as a lump sum, a regular payment, or a combination of both. This flexibility can be a huge relief, especially if you're living on a fixed income or have unexpected expenses.

You can even take your lifetime mortgage with you if you move to a different property, provided the new property is acceptable to your lender as continuing security for your equity release loan.

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The Equity Release Council represents providers and promotes standards of conduct and practice in the sector. Their standards ensure that products meet certain criteria, such as a fixed or capped interest rate, the right to remain in your property for life, and a 'no negative equity guarantee'.

Here are some of the benefits of a lifetime mortgage in a nutshell:

Lifetime mortgages can be more expensive than a standard mortgage, with interest added on to the amount you owe, causing the total debt to grow quickly.

Repaying a lifetime mortgage early can trigger penalties, so it's essential to understand the terms before committing.

Taking out a lifetime mortgage can reduce any inheritance you leave to your heirs, as the debt must be repaid from your estate when you pass away.

With a home reversion scheme, you'll usually get less than the full market value of your home, which may not be ideal for those who want to leave a significant inheritance.

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You'll still have to maintain and insure your home, even if you no longer own it, which can be a significant burden.

A lump sum from a lifetime mortgage is considered capital and may affect tax and inheritance, or your entitlement to means-tested benefits.

Here are some key disadvantages to consider:

There are two main types of equity release plans: lifetime mortgages and home reversion plans.

Lifetime mortgages allow you to borrow some of your home's value, and the loan is repaid when you sell the property, pass away, or go into care. You can choose from various types of lifetime mortgages, such as Interest Roll Up, Optional Payment, Payment Term, Income, and Enhanced lifetime mortgages.

Home reversion plans involve selling a share of your home to the equity release provider while continuing to live there. You can sell between 25% and 100% of your property, but you'll receive less than the market value of that share.

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Here are the main differences between lifetime mortgages and home reversion plans:

It's worth noting that home reversion plans are less popular and only available to older homeowners.

Equity release is a way for homeowners to access some of the money in their home while continuing to live there.

There are two main types of equity release plans: lifetime mortgages and home reversion plans. You can choose between these two options depending on your needs and preferences.

A lifetime mortgage is the most common way of releasing equity. You borrow some of your home's value and this loan is repaid when you sell the property, pass away, or go into care.

Home reversion plans work differently. You sell a share of your home to the equity release provider while continuing to live there. You can usually sell between 25% and a 100% share of your property to the provider.

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If you choose a home reversion plan, you'll receive less than the market value of the share you sell. This is because the home reversion provider takes on the risk that you may live longer than expected, which affects how much they can sell the property for in the future.

Here are the key differences between lifetime mortgages and home reversion plans:

Reversion Plans are a type of equity release available to homeowners aged 60 and over. They allow you to sell some or all of your home to a provider, while continuing to live in it rent-free.

You can receive a lump sum or regular payments, and the money is tax-free. However, you may have to pay rent to your equity release provider, and your loan payments could affect any means-tested benefits you're getting.

With a home reversion plan, you sell a share of your home to the provider, but you receive less than the market value of that share. This is because the provider doesn't know how long you'll live, and they can't sell the property until you pass away or go into care.

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You can usually sell between 25% and 100% of your property to the provider, but the share you sell will be based on your age and health. For example, if you're younger, the provider may demand a bigger share of your home.

Here's a breakdown of how home reversion plans work:

As you can see, the younger you are, the bigger the share a provider will demand from you. This is because they'll have longer to wait before they can sell the property.

At the end of the plan, the home is sold, and the proceeds are divided between the home reversion company and your heirs. The split is based on the ownership share each one holds.

For example, if you sell 50% of your property to the provider, they'll get 50% of the sale price when the property is sold. If you sell them 100%, they'll get all of the sale proceeds.

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A lump sum lifetime mortgage is a type of equity release plan that allows you to receive a single payment, which you can then spend as needed. This payment is usually tax-free and can be used to cover medical bills, day-to-day living expenses, or other financial needs.

You can choose to receive the lump sum payment all at once, which can be convenient if you have a specific expense or financial goal in mind. However, keep in mind that you'll have to pay interest on the entire lump sum, even if you don't use all of the money.

With a lump sum lifetime mortgage, you can withdraw some of your home equity in cash, and interest accrues on the borrowed amount. The home acts as collateral or security for the loan, and the loan would become payable in full when you sell the home, move into a residential care facility, or pass away.

Here are the key benefits of a lump sum lifetime mortgage:

Interest-Only lifetime mortgages are a type of equity release plan that allows you to make interest payments towards the loan during your lifetime.

These payments can be made monthly and are designed to fit your income, with your provider reviewing your finances to ensure the payments are affordable for you. With an interest-only lifetime mortgage, you would only pay interest on the loan, not the capital amount.

This can be beneficial as it means less debt to repay later, as noted in Example 2. By paying some of the interest now, you'll have less to worry about in the long run.

There are no specific requirements for making interest-only payments, but it's essential to review your finances with your provider to ensure the payments are manageable for you.

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A lifetime mortgage is a loan secured against your property where you retain full ownership, and interest accrues on a compound interest basis unless you pay the interest in full each month.

There are several types of lifetime mortgages to choose from, including Interest Roll Up, Optional Payment, Payment Term, Income, and Enhanced lifetime mortgages.

Interest Roll Up Lifetime Mortgages let you draw down your money as one big tax-free lump sum or several smaller ones, without having to pay interest every month, but any unpaid interest is added to your loan.

Optional Payment Lifetime Mortgages allow you to draw down your money as one big tax-free lump sum or several smaller ones, while paying some or all of the monthly interest on your loan.

Payment Term Lifetime Mortgages give you a tax-free cash lump sum, and if you're currently working, you make monthly interest payments until either you retire or reach the age of 75.

Income lifetime mortgages let you take your money as a regular income, usually for a fixed period, and you can also combine this with a small lump sum payment if you need a cash injection.

Enhanced lifetime mortgages work like standard lifetime mortgages, but let you access more equity or a lower interest rate if you're not in very good health.

Here are the five different types of lifetime mortgages:

Interest rates on lifetime mortgages can be quite high due to compound interest, which can nearly double the amount borrowed in just 15 years.

For example, a £100,000 loan at 4.5% interest would still owe £196,156 after 15 years. This is a significant increase in just a short period of time.

Borrowing at a higher rate, such as 6%, can lead to the amount owed doubling around every 12 years. So, a loan of £40,000 could result in a debt of around £160,000 by the time you reach age 84.

Making voluntary partial repayments each year can help reduce borrowing costs, but the interest rate itself can be a major factor.

The average interest rate on a lifetime mortgage was around 4% in early 2022, but this can vary. In fact, the Equity Release Council reported an average advertised interest rate of 6.91% in July 2024, with some deals reaching as high as 8%.

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Early Repayment Penalties can be a concern for those considering equity release plans. You may be allowed to make voluntary payments to reduce your loan balance, but there may be a maximum amount you're allowed to pay.

Some equity release providers may charge early repayment penalties to recover their costs, so it's essential to check the terms of your agreement. This charge can depend on how long you've had the loan and can be as high as 25%.

Most products apply penalties on a sliding scale, with the fee varying according to how long you've had the loan. The charge typically starts at about 5-10% and reduces as you have the loan over a number of years.

However, there are some exceptions. If you want to make partial repayments, you can do this penalty-free for lifetime mortgages that meet standards set by the Equity Release Council. These are often limited to 10% of the loan per year.

If you're considering repaying your loan early, it's worth noting that you can often switch your lifetime mortgage and save money by moving to a provider offering a lower interest rate.

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