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The different types of equity release plans

Outlining different types of equity release, how they work and who can have one

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By Pete Mugleston   Mortgage Advisor

Last updated: 27th February 2019 *

What types of equity release are available?

We receive lots of enquiries asking about the best way to release equity from your house and how many different equity release plans there are. In response to these requests we have outlined below everything you need to know about which equity release schemes are available within the UK.

Once you’ve read through this information, make an enquiry and we can arrange for one of the advisors we work with who are equity release experts to get in touch.

In this article we will cover:

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Why use an equity release plan?

Equity release plans are a very effective way of gaining access to money tied up within the value of your own home. They are designed to help someone who is approaching, or may have already reached, retirement and find themselves debt-free, rich in fixed assets (such as property) but relatively cash poor.

With no requirement for regular repayments, equity release plans are particularly attractive to retiree’s on low pension incomes. Rather than repay the money during a fixed term all the interest rolls up on top of the original amount borrowed and then repaid, either when you die or move into a care home (whichever event occurs first).

For example, a retired couple may wish to help a relative raise money for a house deposit. With only a modest amount of cash in the bank how can the couple get access to a large amount of money in a short space of time?

One option would be to downsize from their current home and move into a smaller one, releasing any excess equity in the process. However, the desire to assist a relative financially may not coincide with a desire to move house or for an appropriate smaller property to become available.

Another option would be to use an equity release plan which allows you to release money from your property without the need to sell it and move elsewhere.


What are the different types of equity release?

Traditionally, there are two main equity release options available in the UK:

  • Lifetime mortgage
  • Home reversion plan

There’s quite a big difference between the two, particularly around the issue of ownership.  


How does a home reversion plan work?

A lifetime mortgage, like any other type of loan, allows you to retain total ownership of your property. Home reversion plans, on the other hand, are not loans. A provider will view your home more as an investment opportunity and this, ultimately, alters the ownership status.

With a home reversion plan a provider agrees to buy a percentage, or all, of your house in return for which you receive a tax-free lump sum and the right to stay in your home, rent free, for as long as you live or have to move into long-term care. You do not have any repayments or interest to pay.

The risk a provider takes is not knowing for sure whether your house will increase in value or not between the point of purchase and your death or move into a care home. To counter this risk the provider will look to pay below the market value for the share of your property it is purchasing.


Will I still own my home?

No. Unlike with a lifetime mortgage, you are giving up total ownership of your property and any future increase in value of the percentage of your home covered by the home reversion plan. At the end of the plan your property will be sold and the proceeds split as per the new ownership shares.

For example, a retired person has a house worth £200,000 and they sell 50% to a home reversion plan provider. 10 years later they die with the house now worth £300,000. The provider would be entitled to £150,000 once the property is sold (if that is the sale price achieved).

Of the two, home reversion plans are not particularly popular due to the flexibility and variety of features available with a lifetime mortgage. 


How does an equity release lifetime mortgage work?

A lifetime mortgage is a type of loan that allows you to borrow money against the value of your main residence whilst retaining full ownership of the property. There is no requirement for regular payments of either capital or interest to be made unless done so on a voluntary basis.

All the interest which accrues is added to the outstanding balance and repaid when the property is eventually sold. So, unlike conventional mortgages where the debt decreases over a period of years, the debt owed for a lifetime mortgage will increase as the interest rolls up on top of the original amount borrowed.

This is why equity release lifetime mortgages are sometimes referred to as reverse mortgages in the UK (in fact, this is the collective term used for these products in lots of other countries such as USA, Canada and Australia).

The money you borrow can be released to you in one of two ways:

  • One tax-free lump sum payment
  • Drawdown facility

A drawdown facility allows you to take a smaller lump sum upfront and then take the remaining amount as and when you require. The benefits of a drawdown facility mean you will only accrue interest on the money you have withdrawn and can use this option to top up your retirement income.


How long do I have to pay off the loan?

There is no fixed term for the debt to be repaid with a lifetime mortgage. What you borrow, including accrued interest, is only paid back to your lender either when you die or when you enter a long-term care home (whichever event occurs first). In the case of a joint lifetime mortgage this would be on a last survivor basis.

In the event of your death or move into a care home, your home can be sold to clear the outstanding mortgage debt. Any remaining equity will be returned to your estate and distributed to beneficiaries in accordance with your will.

Fixed rates of interest and rate caps are quite common, in fact lifetime mortgages available from lenders who are members of the Equity Release Council must be fixed for life, or if variable they must have a cap.

For more information on the interest rates available for lifetime mortgages, take a look at our article here or talk to one of the expert advisors we work with.


Who is eligible for an equity release lifetime mortgage?  

You are eligible for a lifetime mortgage if you are over the age of 55, own your main UK residence outright (security will only be taken by a lender against your main residence) and reside within the country for at least six months of the year.

For joint lifetime mortgages the minimum entry age applies to the youngest applicant. It is possible for one of the applicants to be younger than 55 and still be accepted, however, it would require a transfer of their share of equity in the property across to the older applicant.

Some lenders may apply a maximum age at outset of 85, a few will go as high as 95 and a couple have no upper age limit. They may also require verification that the applicant is capable of making a decision to borrow money at this stage of their life.

Lenders rarely apply a maximum age at the end of the term as lifetime mortgages are designed to remain open until either the applicant dies (or last living applicant in the case of a joint lifetime mortgage) or they move into a care home, whenever that may be.


How much can you borrow for an equity release lifetime mortgage?

With a conventional mortgage, your income, your outgoings and your deposit size all play major factors when determining how much you can borrow. With a lifetime mortgage none of that really matters as you don’t need to make any regular payments , therefore, affordability isn’t quite so relevant.

What does play a key factor is your age, your health and the value of your property. Basically, the older you are, the more you are able to borrow. Rather than affordability criteria, it is a lender’s medical health assessment that will form the basis for the loan to value they will offer.

Lifetime mortgages loan to value ratios are more attractive if your over 70 than if you’re over 60 and so on. It all works very similar to how retirement annuity rates are calculated.

The maximum loan to value available will differ from lender to lender. Depending upon the factors outlined above, most lenders will offer a maximum loan to value of 50% and some will go as high as 55%.

If you’d like to hear more about how much you can borrow for equity release plans, make an enquiry and we can arrange for an advisor we work with to get in touch.


What is an enhanced lifetime mortgage?

An enhanced lifetime mortgage is a bespoke version of the equity release plan outlined above. Following a review of an applicant’s health assessment and medical records there may be clear evidence of poor health and low mortality expectations. As a result some lenders may view this as a short term equity release plan.

Enhanced lifetime mortgages use similar guidelines to enhanced annuities when assessing the life expectancy of an applicant, offering higher loan-to-value thresholds and reduced interest rates over and above what is standard.


What are flexible equity release plans?

This is a term some lenders might use to refer to interest only flexible lifetime mortgages, plans which offer some leeway with regard to how you make the mortgage payments. For instance, you could choose to make full or partial interest payments each month - but some lenders will also give you the option to switch to a regular lifetime mortgage with rolled up interest instead.

The main benefit of flexible equity release plans is that you can reduce or end your monthly payments if your circumstances change, but there may be additional admin costs to foot if you decide to switch to a standard lifetime deal.


What are the best ways to release equity from your home?

Customers often ask us things like “what is the best way to release equity in a property?” and the answer will likely depend on your needs and circumstances. Remortgaging is a common way to access any capital that is tied up in your home, and you can find our dedicated section on that here.

Equity release products, which is what this article is all about, are also an option for borrowers over 55 - but an important distinction should be made between ‘releasing equity’ and ‘equity release’. Equity release is a product type in its own right, while releasing equity refers to unlocking capital tied up in a property or asset you own.

If you’re unclear on the difference between equity release and releasing equity, or would like to know what other options might be available, make an enquiry and the brokers we work with will answer your questions and lay out all of your options.


What types of property can you use for equity release plans?   

A lender will use your main UK residence as the basis for the lending you’ve applied for and as security for the equity release plan. A lender must feel sure that, at some unknown point in the future, they can sell your home and recoup what they’re owed. At such time, your property needs to be in a sellable condition.

The construction type and material build, therefore, are important factors during the application process.  Most lenders will not consider properties worth below £70,000 as appropriate for this form of lending.

Non standard construction properties, such as timber framed homes for example, will be considered on a case by case basis and the outcome will vary from lender to lender. Park homes would not be considered acceptable security for this type of lending.


Can you get an equity release plan with a poor credit history?

A poor credit history doesn’t usually have an impact upon equity release plans as there’s no requirement for an affordability assessment to be conducted.  

An applicant is still required to declare this information and it could, potentially, impact the interest rate offered by a lender who may request that any outstanding debts are cleared before approval is granted.


Why you should speak to an expert equity release broker

At Online Mortgage Advisor we can offer you a first-class service tailored to your own specific needs with access to the most experienced brokers available that:

  • Have whole of market access
  • Have excellent relationships with lenders
  • Are OMA accredited advisors
  • Have completed a 12 module LIBF accredited training course 


Speak to an equity release expert

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 27th February 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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