What is the difference between equity release and a lifetime mortgage?

Equity release enables homeowners over 55 to continue to live in their home while getting a cash lump sum or income from it. A lifetime mortgage is one of the two main types of equity release plans, the other being a home reversion plan.

Lifetime mortgages are by far the most popular type of equity release accounting for 99% of plans sold.

What is equity release?

Demand for equity release is strong as the long-term trend of rising property prices has continued, despite the coronavirus pandemic. Alongside economic uncertainty, this means that for many over-55s their home is their most significant financial asset.

Both lifetime mortgages and home reversion plans are financial products, designed to enable older homeowners to access some or all the equity in their home as cash, whilst continuing to live there for life.

Your equity is the value of your home minus any loans secured against it: for example, a £350,000 home with a £50,000 mortgage leaves £300,000 of equity. Hence the term ‘equity release’ is used for both products, as they are a way to access this money.

What are the differences between lifetime mortgages and home reversion plans?

The fundamental difference between the two is that when you take out a lifetime mortgage you retain full home ownership. But with home reversion plans, you sell a share of your home in exchange for a cash lump sum or regular income for the rest of your lifetime.

The other main difference is that with a lifetime mortgage, compound interest builds up as over the life of the plan – until you pass away or move into long-term residential care – at the fixed interest rate agreed at the time you take out the plan.

With home reversion plans, there is no interest building up as it is not a loan. The price that you’re offered for the percentage of the property you’re selling is calculated by how long the reversion company expects the plan to run.

Lifetime mortgageHome reversion plan
How it worksA lifetime mortgage is a loan secured against your home. It is designed to last your whole life, with interest rolling up over time. There is no obligation to make any monthly payments, but there are options to do so if you choose.

 

The provider buys a share (or all) of your property in exchange for a lump sum or regular income. The amount you receive will be less than the current market value of your property as you retain the right to live there, rent free, until you pass away or move into long-term care.
Who qualifiesUK homeowners aged 55 or over with a property worth at least £70,000, who are looking to borrow at least £10,000.Usually this starts at 65 , but it can vary and some providers may accept applications below this age.
How much money you could getHow much you can borrow will depend on your age and property value. The older you are the more you can borrow, usually up to a maximum is 60%.Providers generally offer between 20% and 60% of the value of the share of your property that you wish to sell.
At the end of the planWhen you pass away or enter permanent residential care (both if in couple) your lifetime mortgage will need to be repaid. At this point, the full amount borrowed, plus interest will usually be cleared with the sale of the home.The plan will come to an end when you have either passed away or entered permanent long-term care (both if in couple). When the property is sold, the provider receives their share of the sale proceeds, based on the share that you have sold to them.
Changing your mindYou can choose to pay your lifetime mortgage back, but you may incur early repayment charges.You may be able to buy back the share of your property, but this will be at the full market value at the time of sale.
What the equity release provider getsThe interest on the mortgage is usually ‘rolled-up’ and added to the mortgage although with some plans you can choose to pay the interest if you wish.The equity release provider buys the share of your home for less than market value. They can then sell this at the full rate when your plan comes to an end.

 

Getting all the facts

Accessing even a portion of the built-up equity in your home could be a great way to give you finances a much-needed boost. But if you are considering equity release – whether that’s a lifetime mortgage or home reversion plan – it’s important that you get all the facts from a suitably qualified adviser. We offer UK whole of market advice with no upfront fee & without obligation.

Your adviser can search a range of products to identify one that best serves your situation and talk you through the features. They’ll always provide you with a written personalised illustration so you can assess your finances before committing. They’ll explain how all equity release products reduce the amount you leave behind in your estate when you pass away and help you to understand how releasing cash could affect your entitlement to state benefits.

Your questions answered by an equity release expert

If you’re looking to gather some facts yourself before speaking to an adviser then we’ve answered some of your frequently asked questions…

How do I take out an equity release plan?
Because of the number of products available, qualified advice is essential to releasing equity, as a lifetime mortgage could affect your entitlement to means-tested benefits.

If, after consulting an adviser, you decide to proceed, you submit an application, and your chosen provider will instruct an appropriate surveyor to carry out a valuation of your home.

If you are happy at this stage, you can move on to the completion process. This may takes 6-8 weeks, but once completed, the money will be paid into your nominated bank account.

At this point you must clear any outstanding mortgage against your home and then you can spend the money however you wish.

Why are lifetime mortgages so popular compared to home reversions?
In recent years more lenders have started offering lifetime mortgages and the result has meant more options and features for homeowners, making them an attractive option:

  • Flexibility – Some products allow you to take as little as £10,000 tax-free and leave more funds in reserve for when you need it.
  • Security – With all lifetime mortgages, your home remains your own – you have just borrowed against it.
  • Inheritance protection – Part of the value of your home can be passed on if you choose a plan with an Inheritance Protection option.
  • Control – There are several options available to help control the impact of build-up of interest over time. A drawdown lifetime mortgage offers the facility to create a reserve of equity that is interest-free until accessed, while some lifetime mortgages give you the option to clear the interest monthly, which can greatly reduce the cost of borrowing.

Safeguards from Equity Release Council-approved lenders can also be appealing. These include:

  • A no-negative-equity guarantee, ensuring you never owe more than your home’s value.
  • The right to remain in your home for as long as you want, or until you move into full time residential care.
  • The freedom to move to another property without financial penalty (subject to criteria).

What are the interest rates?
Most lifetime mortgages have an interest rate that is fixed for life, and although there are variable options, most people opt for fixed rates, as you can see exactly how the amount you owe will increase over time.

The Equity Release Council reporting favourable pricing in Q4 2020 which saw the average equity release interest rate fall to 4.01%, with the lowest rates at 2.30% – less than the average 10-year fixed rate mortgage.

Do I have to make repayments?
including the option to make voluntary payments on the interest of your lifetime mortgage. Many lenders will allow you to pay back up to 10% of the initial amount borrowed per year, but you could also opt for an interest-only plan. By paying the interest monthly, you would prevent the amount that you owe from increasing over time, helping to reduce the overall cost of borrowing.

What are the costs/ fees?
When you take out either a lifetime mortgage or home reversion plan following an Equity Release Works recommendation, we charge an advice fee of £995, payable on completion. There may be other costs associated, including:

  • solicitors’ fees
  • survey fees
  • application fees.

It is also worth noting that lifetime mortgages also are designed to do just that – last a lifetime and many carry large early repayment charges should you decide to repay the mortgage early.