If you are thinking about using your home to raise money through equity release, there are two main options to consider. These are lifetime mortgages and home reversion plans.
Both let you get cash out of your property, but they work in different ways.
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These are the most common type of equity release plan and they involve you borrowing a certain sum of money which is secured against your home. Unlike a standard mortgage, where you typically repay a portion of the capital plus interest every month, you normally don’t make any repayments on a lifetime mortgage while you are still living in the property.
What is equity release?
When you die or move into long-term care, the loan and the interest that has accrued are repaid out of the sale proceeds of your home. Leading equity release providers should offer what’s known as a “no negative equity” guarantee: this means that the amount owed on a lifetime mortgage can never exceed the property’s value.
Lifetime mortgage options
A slightly different form of lifetime mortgage may suit you better. One option is an interest-only lifetime mortgage: this means you make monthly interest repayments on the equity you have released, with only the capital being repaid when the house is eventually sold.
The advantage here is that you know exactly how much you or your family will have to repay in the end – but your monthly outgoings will increase.
What is equity release used for?
One way of limiting interest charges is to use a drawdown facility: this means you only take money out of your property as and when you need it. Interest will only be applied to whatever equity you have released so far, so your overall bill will be smaller than if you released the full amount up front.
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Home reversion plans
These involve you selling part or all of your home to an equity release company while retaining the right to live in it, rent-free, for the rest of your life.
When you die or move out, the equity release company is paid in line with the size of its stake. So if your original deal was based on giving up 40% of your home, the company will be entitled to 40% of the eventual sale price.
The amount of money you can release via home reversion will invariably be less than the current market value of your property: this is to reflect the fact that the company will not get any return on its investment for many years.
Downsizing to raise money in retirement
For example, say you owned a home which was worth £200,000 and sold 40% of it to a home reversion company. Although this 40% is currently equal to £80,000, you might only get an advance of £40,000 (although the actual size of this discount can vary considerably depending on factors such as your age and state of health).
One advantage of a home reversion plan is that, if you only sell part of your home to the equity release company, you can be sure there will be some equity left over to pass on to your family.
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