What are the different types of equity release plan?

When looking at a lifetime mortgage vs home reversion, they are both forms of equity release plan but a major difference is that with a home reversion plan, you no longer own all of the property.

A lifetime mortgage plan is a loan secured against your property and you retain full legal ownership of it. The loan and the interest are repaid when the property is sold when you pass away or move into long-term care.

A home reversion plan does not require you to borrow against the value of your property, therefore there is no interest to pay. Instead, a home reversion plan involves selling all or a percentage of your home to a home reversion provider.

Both of these equity release products can help your finances by providing you with a tax-free lump sum, future payments, or both. You’re also free to remain in your home for the rest of your life with both a home reversion and a lifetime mortgage.

While home reversion used to be a popular equity release product, now only a relatively small number of plans are sold. Even so, it could be a suitable equity release option depending on your circumstances.

With a regular lifetime mortgage, you have zero monthly repayments and any interest that builds up is paid along with the loan itself once the property is sold when you pass away or move into long-term care.

An alternative is an interest-only lifetime mortgage where you make voluntary payments of some or all of the interest to reduce or prevent the interest building up. Some lifetime mortgage plans also allow you to pay off some of the borrowed capital.

Just as with a normal residential mortgage, you should be aware of costs involved in setting up an equity release plan. Your adviser will make sure you understand these in full before you decide whether to take out a plan, but below is a summary.

Your lender will typically charge valuation, arrangement and completion fees, with further fees payable to the solicitor who acts for you. Some of these fees can be paid from the money you borrow, so you may not have to worry about finding them from your existing savings.

Our selected advisers naturally charge an advice fee – but remember that any initial advice or information you receive from them is completely free and without obligation. You only pay them a fee if you apply AND your case completes.

Once a plan is taken out, there aren’t normally any fees. One exception is an early repayment charge that some lenders request if some or all of your lifetime mortgage is paid off before you pass away or move into long-term care.

Equity release has worked for thousands of over 55s in need of tax-free cash. But it’s important to understand both the benefits and risks before deciding if it’s right for you, so here are some potential risks you need to be aware of.

Lifetime mortgage risks:

• Interest is calculated daily and added to the amount you owe each month. The amount owed therefore increases and reduces any equity left in your home when the plan ends, unless you choose to make interest payments while the plan is running.
• Taking equity out of your home will mean that the inheritance you leave to loved ones will reduce.
• If you give some of the money you release to family as a gift, they may be liable to pay inheritance tax in the future.
• You may have to pay an early repayment charge if you choose to pay back some of the loan early.
• Borrowing money through a lifetime mortgage may affect your entitlement to some means-tested state benefits. During your appointment with one of our selected equity release advisers, they will help you establish whether your benefits could be affected.

Home reversion risks:

• There is a considerable shortfall between the value you’ll receive for a share of your property, compared to its current market value.
• If you pass away soon after taking out a plan, your loved ones will lose a significant proportion of your home’s market value.
• If you decide to sell 100% of your property, your loved ones will not inherit anything from your home when you pass away.
• It’s difficult to reverse a plan if you decide to buy back part of your home. In this case you would pay the full market value, not the discounted rate at which you sold it.
• You no longer retain full legal ownership of your home.

Having a large cash lump sum in your bank account might affect your entitlement to some means-tested state benefits. During your appointment with one of our selected equity release advisers, they will help you establish whether your benefits could be affected.