Which equity release product is right for you?

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Date: 26 July 2021

An older couple relax on the sofa

With more and more homeowners starting to consider equity release as a way of accessing more funds during retirement, it's more important than ever for customers to know the different types of product available so they can make the right choice.

A specialist equity release advisor will be able to help you compare your options and come to the right decision for you and your circumstances. However, taking a moment now to learn about the different products available will help you to make a more informed decision further down the line.

This guide will go through the main equity release products available, including how each one works, and the pros and cons of each product.

Lifetime mortgages

Lifetime mortgages are by far the most popular equity release products and take up the majority of the equity release market. Some lenders and brokers now only offer lifetime mortgage products.

A lifetime mortgage allows you to release the equity that you've built up in your home, whilst being able to carry on living there. You will not transfer any ownership to the lender, they will just hold a charge over the property, like a mortgage.

No monthly repayments are required throughout the full term of the loan as the capital and interest are both repaid when your property is sold after you move into permanent care or pass away.

Lifetime mortgages have developed over recent years and now allow greater flexibility in how you can release equity from your property.

Lump sum lifetime mortgage

As the name suggests, a lump-sum lifetime mortgage allows you to release the equity in your home in one tax-free lump sum. This is ideal if you need the money to make home renovations or if you would like to give your beneficiaries an early inheritance, for example.

The amount you'll be able to release will depend on the value of your property and your age. If you want an estimate of how much you could release, then you can use an online equity release calculator.

The interest will be added to the capital on a rolled-up basis and will be repaid when your property is sold.

Pros

  • You can release a large amount of money in one go if needed.
  • The lump sum is tax-free.
  • You don't have to make any monthly repayments during the term of the loan if you don't want to.
  • Most lifetime mortgages will have a fixed rate applied, giving you security in knowing how much you'll owe in the future.

Cons

  • You will be charged interest on the full amount that you release from the outset, regardless of whether you use it all in one go or not.
  • The interest is applied to the loan on a rolled-up basis, this means you'll pay interest on the interest already added to the loan.
  • A lifetime mortgage might make it difficult to move home in the future as any new property would be subject to the lender's lending criteria.
  • A lifetime mortgage could affect your eligibility for certain means-tested benefits.

Regular income lifetime mortgage

Some lenders offer regular income lifetime mortgages. This is when, rather than releasing the money in one lump sum, the money can be used to purchase an annuity which then provides a monthly income. This could be a good option if you're looking for a way to boost your income throughout retirement if your pension isn't sufficient.

Pros

  • It provides a regular, tax-free income to support your pension throughout retirement.
  • You don't have to make any monthly repayments during the term of the loan.
  • Most lifetime mortgages will have a fixed rate applied, giving you security in knowing how much you'll owe in the future.

Cons

  • An increased income could affect your eligibility for certain means-tested benefits.

Drawdown lifetime mortgage

This option allows you to withdraw smaller lump sums as and when you need them, rather than releasing all of the available equity in one go.

This could be a good option for you if you don't need a huge lump-sum or a regular income, but you want some money easily available right away, and for any plans in the future.

Pros

  • You will have easy access to money as and when you need it.
  • Interest is only charged on the amount you draw down, so the effects of rolled-up interest are less than if you withdrew the full amount in one go.

Cons

  • An increased income could affect your eligibility for certain means-tested benefits.

Home reversion

Home reversion plans are less common as many lenders only offer lifetime mortgages. However, you may want to consider a home reversion plan depending on your requirements. 

A home reversion plan will allow you to release money from your property as a tax-free lump sum, an income, or both. You do not have to make any monthly repayments and you can continue to live there until you move into permanent care of pass away.

The difference with a home reversion plan is that you will be selling a proportion of your property to the lender, meaning that proportion of the home is no longer owned by you. You can continue living in the property based on a lifetime lease. When you pass away and your property is sold, the lender will take the proceeds from the percentage of the property owned by them and the rest will go to your estate.

Pros

  • As you will still own a certain percentage of the property, you will know exactly what proportion of your home's value will be left to your family.
  • The money released is tax-free and you do not have to make any monthly repayments.
  • You, or your beneficiaries, will still benefit from an increase in house prices based on the proportion of the property still owned by you.
  • Home reversions are portable so you can move to a different property even after taking out the loan.

Cons

  • You will no longer own 100% of your home.
  • If you sell 100% of your property to the lender, there will be no property value to leave your family.
  • You, or your beneficiaries, will lose out on future house prices increases on the proportion owned by the lender.

Copyright 2021. Featured post made possible by Holly Andrews, Managing Director at KIS Finance.

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