There are two different types of equity release schemes, a lifetime mortgage or home reversion plan. However, there are also several types of lifetime mortgage to choose from:
- Lump sum lifetime mortgage
- Drawdown lifetime mortgage
- Interest only lifetime mortgage
- Protected lifetime mortgage
- Enhanced lifetime mortgage
The following guide explains how each of the different options works.
What is a lifetime mortgage and how do they work?
A lifetime mortgage is a loan secured against your home that lets you to release equity tied up in your property. The money you receive is tax free with no monthly repayments. The loan is only repaid once you die or move into long-term care and the property is sold.
Although one of the main features of lifetime mortgages is that there are no monthly repayments, there are several different types of mortgage to choose from. For example, flexible schemes that let you repay some of the interest or options that allow you to ringfence inheritance for family.
Here are the different types of equity release lifetime mortgages:
Lump sum lifetime mortgage
A lump sum lifetime mortgage, often referred to as a roll-up lifetime mortgage releases cash in one single payment. The interested is added to the loan on either a monthly or yearly basis and repaid from the sale of your property once you have died or moved into permanent care.
Drawdown lifetime mortgage
Drawdown lifetime mortgages let you release equity as and when you want, rather than a single payment. So you can take an initial lump sum leaving the rest in reserve until you need it. And you only pay interest on the money you drawdown, not the money held in reserve.
Interest only lifetime mortgage
Interest only lifetime mortgages let you pay some, or all the interest on a monthly basis, therefore reducing the size of your loan. Some interest only equity release mortgages require regular payments however others are flexible, meaning you can repay the interest as and when you choose.
Protected lifetime mortgage
Protected lifetime mortgages let you protect a percentage of the value of your property, which means you can guarantee an inheritance for family. However, protecting some of your property value this way will reduce the amount of equity you can release.
Enhanced lifetime mortgage
Enhanced lifetime mortgages or impaired lifetime mortgages as they are also known are designed for people with medical conditions and shorter life expectancy. You can usually release more equity with this type of scheme and the interest rates can be lower as the risk to the lender isn’t as great.
Home reversion plan
What is a home reversion plan and how do they work?
A home reversion plan lets you release equity by selling all or part of your home, usually for less than the market value. Although you no longer own all your home, you can continue to live there rent free until you die or move into permanent care.
With this type of equity release scheme, you will still be responsible for the upkeep of the whole property however you will only benefit from any rise in house prices on the percentage of property you own.
Once the property is sold, your home reversion plan lender will receive their share of the proceeds based on the percentage of property they own. The remaining balance will be paid to your beneficiaries.
For more information on things you should consider before choosing a lifetime mortgage or home reversion plan, visit our pros and cons page.