Understanding Equity Release Examples

Equity Release products can be a good option for some people. However, the main products on offer - lifetime mortgages and home reversion plans - work slightly differently from each other. We explore the key differences to help you decide whether equity release is suitable for you and which product is likely to suit your needs best.

What is Equity Release?

Equity release products are designed to allow homeowners in the UK to access some of the value held in their property without having to sell their home. It's intended for people over the age of 55 who want to continue living in their homes while benefiting from the appreciation in its value.

People who use equity release products do so for various reasons. They provide a tax-free lump sum that can help boost your retirement, pay off a debt, or fund a home improvement project, among others.

There are two main types of equity release products: lifetime mortgages and home reversion plans. In the next section, we will explore both in detail to help you decide which one might work better for you.

Types of Equity Release

Both lifetime mortgages and home reversion plans work similarly. You typically need to be at least 55 years old to access either of these products and your home will need to be valued at at least £70,000 too. With both types of products, you can receive a tax-free lump sum and continue living in your property until you die or move into permanent care.

However, the key difference between the two is that a lifetime mortgage is a secured loan against your property where you technically continue to own your property. In contrast, a home reversion plan involves you selling off (a portion of) your property to the home reversion provider. In the latter case, you no longer own the property (at least not in full).

Lifetime Mortgages

A lifetime mortgage works similarly to other types of secured loans. You borrow money against the value of your home at a set interest rate. This interest rate accrues over the life of the loan. The loan is then repaid from the proceeds of the sale when you move into long-term care or die.

The biggest drawback of lifetime mortgages is the fact that interest compounds for the duration of the mortgage. This could mean that by the time you die or move into care, you owe so much that the lifetime mortgage provider keeps all of the proceeds of the sale to cover the loan you owe.

One way to mitigate this is by paying off the interest on your loan, much like you would if you had an interest-only mortgage.

With a lifetime mortgage, you can typically unlock between 20% to 60% of the value of your home in the form of a loan. So, if your property is worth £100,000, you could borrow between £20,000 and £60,000.

The exact amount available to you will depend on various factors including your age and property value.

Home Reversion Plans

Home reversion plans are a less common way to access the equity in your home. Instead of taking out a loan against your property, a home reversion plan allows you to sell (a portion of) your home to a home reversion provider. The provider then provides a lump sum or regular payments.

Typically, you can then continue living in your property rent-free until you either die or move into permanent care. The home is then sold, and the home reversion provider receives an amount proportionate to the portion you sold initially.

The "catch" with home reversion plans is that you typically receive less than the market value of your property. You will typically only be offered between 20% to 60% of the true value of your property, depending on your age. So, if your home is worth £100,000 and you decide to sell the home through a home reversion scheme, you may only get £20,000 from the home reversion plan.

That said, if you sold your home the traditional way, you would (obviously) not be able to continue living in it and would therefore have additional housing costs regardless. As such, home reversion plans work well for some people who are looking for a tax-free cash boost and may not have family or friends to leave their home to after they die.

Lifetime mortgages vs home reversion plans

The table below summarises the key similarities and differences between lifetime mortgages and home reversion plans to help you decide which is suitable for your needs.

Feature	Lifetime mortgage	Home reversion plan
The provider offers a secured loan against your property's value	Yes	No
(A portion of) your property is sold off to the provider for less than the market value	No	Yes
You need to be at least 55 years old	Yes	Yes
Your property needs to be worth at least £70,000	Yes	Yes
You can continue living in your home until you die or move into care	Yes	Yes
Interest accrues for the duration of the loan	Yes	No
The money owed is repaid from the sale of your home	Yes	Yes
You will never owe more than the value of your property when sold^	Yes	Yes

^Your estate won't owe more than the value of your property when it's sold as long as your product comes with a no negative equity guarantee which is the case for most reputable equity release providers. 

As you can see, equity release is complex, and speaking to a financial advisor who understands the ins and outs of these products is a good idea. You can book a free, no-obligation equity release consultation* via our website to help you decide whether it's right for you.

Advantages and Disadvantages of Equity Release

Whether you choose a lifetime mortgage or a home reversion plan, equity release products come with pros and cons that you should think about.

Below, we've summed up some of the advantages and disadvantages we discussed in more detail above to help you decide whether these products are right for you.

Advantages of equity release

• Tax free cash to help boost your retirement pot
• Can continue to live in your own home
• No need to pay off any of the loan until after you die or move into care
• Flexibility in how your funds are received (lump sum or instalments)

Disadvantages of equity release

• The value of your estate will be reduced
• Compound interest on lifetime mortgages can add up
• You lose ownership of (some of) your property with home reversion plans
• You get less than the true market value of your property with home reversion plans

FAQs on Equity Release

Below, we cover some of the most frequently asked questions about equity release products.

What are the pitfalls of equity release?

The major pitfall of all equity release products is that the value of your estate will be reduced which will affect the amount you can leave behind for your family or friends. Your loan or home reversion arrangement will be repaid using the proceeds from the sale of your home.

This could mean that your beneficiaries can't stay in your home (or inherit your home) after you die. In addition, they will not be able to receive all of the money from the sale of your home. As such, the amount you can leave behind will be reduced. It's therefore a good idea to have a discussion with your family before you take out this type of plan so that they are aware of the consequences.

How much do you pay back on an equity release?

The exact amount that will need to be repaid will depend on various factors including the type of product you select. With a lifetime mortgage, the initial loan will need to be repaid in addition to any interest that has accrued. Interest on these types of products compounds, so it can quickly add up to a sum significantly higher than the one originally borrowed. To give you an example, a £60,000 loan with a 6% interest rate over 25 years will "cost" a total of around £257,000.

With a home reversion plan, the exact amount depends on whether you sold your entire home or just a portion of your property. If you sold your entire home, then the home reversion provider would keep the full amount of the sales proceeds. If you sold a portion of your home, then they would take a portion of the sale proportionate to their share in your home.

In both cases, the vast majority of reputable equity release products come with a no negative equity guarantee which means your estate will never owe more than the proceeds from the sale of your property. Any amount you owe beyond that will be written off.

What is the catch of equity release?

The "catch" with equity release depends on the product you choose. With lifetime mortgages, the main "catch" is the compounding interest, which can result in a much higher amount being owed than the original loan amount. This can be alleviated to an extent if you opt to cover some of the interest as you would with an interest-only mortgage. Of course, this is only really a "catch" if you have family or friends that you wish to leave an inheritance to.

The "catch" with home reversion plans is that you will receive less than the true market value of your property. You will only receive somewhere between 20% and 60% of the value of the property at the time when you sell it. Your home reversion provider will not only get a great deal on your home when they buy it, but they will also be able to benefit from the appreciation in value when they go on to sell it after you die or move into care. That said, it may be worth it for some people who value remaining in their own homes and who may not have a family to leave an inheritance to.