A detailed guide to equity release: what it is and how it works.

David Banks's picture
Authored by David Banks
Posted Thursday, January 10, 2019 - 9:05pm

Those looking to draw cash from the value of their properties have to grapple with a wide range of products. Confusingly, even the equity release market itself uses the terms “equity release” and “lifetime mortgages” interchangeably, when they are two entirely different things.

Here, The Exeter Daily explains the most common types of equity release in an easy to understand way.

What is a lifetime mortgage?

A lifetime mortgage is the most common form of equity release and it involves borrowing a sum of money against the value of your home. As its name suggests, it is designed to last a lifetime, with interest accruing monthly. You continue to own the home and you can choose to make monthly repayments during your lifetime. The borrowed amount is fully repaid when you die, go into long-term care or sell the property. The cash tied up in your home is tax-free and is commonly spent on clearing debts, care fees, home improvement, gifts and holidays. These specialized mortgages are available to homeowners who are over the age of 55.

Lump Sum

A lump sum loan is the usual form of lifetime mortgage and it involves taking the loan amount cash up front and in full. Interest builds upon the loan amount and is charged periodically until you die or go into long term care.

Drawdown

With drawdown, you receive the agreed amount of cash in regular tranches.

The type of lifetime mortgage you choose will depend on how you want the money from your house released. Speaking to a financial adviser can help you decide what product is right for you and which product features suit your lifestyle. Key Retirement Solutions can help you find the right product for your needs. They provide independent, expert advice both in person and through their website at keyadvice.co.uk.

Reversion Plans

Home reversion schemes differ from lifetime mortgage schemes in several ways. Home reversion plans are not loans. Another difference is that the specialised mortgage allows you to keep ownership of the entire property while home reversion schemes require you to sell all or part of your property. With home reversion, you and your heirs only receive a percentage of the home’s value when the property is sold.

How are equity release loans repaid?

There are different ways you can repay your equity release loan. The first way to pay your loan is through interest paying which involves making either monthly or ad-hoc payments. The second option is known as interest roll-up. With interest roll-up mortgage, no interest is paid during the lifetime of the borrowed amount since the interest is added to the debt every month. The loan amount plus the accrued interest is repaid at the end of your mortgage term. Another way to pay your equity release loan is to service your interest. This allows you to pay interest at intervals. The last option is known as voluntary payments which lets you pay up to 15% of the original amount borrowed each year.