TYPES OF EQUITY RELEASE & LATER LIFE LENDING PRODUCTS

With a wealth of information available on the internet, you may already have some knowledge or awareness of the two main Equity Release products, being Lifetime Mortgages and Home Reversion Plans.  But not so well known (yet) because they are more recent products, is a Later Life mortgage and Retirement Interest Only (RIO) mortgage.  You may find our Quick Reference Guide useful which compares the four types of Equity Release.

Some Equity Release adviser/broker firms only deal with Lifetime Mortgages and Home Reversion. We advise on ALL FOUR products, together with standard mortgages, and offer the COMPLETE Equity Release service.

It’s important to understand that Equity Release is NOT a “one size fits all” product and the reason for considering Equity Release will be a major factor in deciding upon which Equity Release product will provide the best solution for your needs.

Whilst products may appear similar and share common features, they can be significantly different.  Even products of the same type can be significantly different, for example, one lender’s Lifetime Mortgage is not the same as another lender’s Lifetime Mortgage.

Our mission is to help you understand how Equity Release can provide an innovative solution to your particular financial needs and requirements.

LIFETIME MORTGAGE – From age 55

Being a mortgage you will still own your home but a Lifetime Mortgage has three key differences compared to a traditional mortgage:

  • No monthly repayments are required with a Lifetime Mortgage, or will ever be required
  • Borrowing is based on the applicant’s age (youngest if joint) and the property value, not the applicant’s income
  • The mortgage is “for life” (or until the borrower(s) leave the property)

Because no monthly repayments are required, interest rolls up on the mortgage increasing the mortgage balance.   However, voluntary payments can be made (subject to terms and conditions) to cover the accruing interest, or to reduce the mortgage balance, or even to repay the mortgage.

For piece of mind, the interest rate on an Equity Release Council approved Lifetime mortgage is fixed for the life of the mortgage so even before you enter into a Lifetime Mortgage, your personal illustration will show you exactly what the future balance of the mortgage will be year on year.  But for ultimate piece of mind, an Equity Release Council approved Lifetime mortgage comes with a “no negative equity guarantee” which means that you or your estate will never owe more than your property is worth.

If you’re worried about leaving something to your children, a Lifetime Mortgage allows you to ring-fence a proportion of your property to leave to your children, typically known as “Dependent Protection” or “Inheritance Guarantee” or similar.  For example, if you’d like to be certain of leaving 25% of the property value to your children, your Equity Release will be based on 75% of the property value, not its full value.  This safeguards a minimum 25% of the eventual sale price of your home for your children.  However, your children could receive more than 25% depending on the balance of your Lifetime Mortgage at the time, but not less than the protected 25%.

If you later decide to move house the mortgage can be transferred to a new property subject to the lender’s criteria at the time.

You remain responsible for the maintenance and upkeep of the property at all times.

The mortgage is repayable on your death (second death if joint) or if you leave the property.

MONEY RELEASED VIA A LIFETIME MORTGAGE IS PAID BACK AFTER YOU DIE FROM YOUR ESTATE.  THIS MEANS THE INHERITENCE YOU LEAVE TO YOUR LOVED ONES COULD GO DOWN, AND IN CERTAIN CIRCUMSTANCES, COULD COMPLETELY DIMINISH.  PLEASE FOR A PERSONALISED ILLUSTRATION

HOME REVERSION – From age 60

 Home Reversion involves selling a part, or all, of your property to a Home Reversion provider in order to release equity while retaining the right to remain in your property, rent free, for the rest of your life.

The Home Reversion product provider will purchase all or part of your house taking into account your age (youngest if joint) and will provide you with a tax free cash lump sum (or regular payments) and a lifetime lease, guaranteeing you the right to stay in your property rent-free for the rest of your life/lives, or until you leave the property.  There is no day-to-day interference and no restrictions on treating the house exactly as before, as a private home to live in freely.  Whether you sell all or part of your home to the provider you remain responsible for the maintenance and upkeep of the property at all times

If you’re worried about leaving something to your children, by not taking the maximum Equity Release from your property you retain part ownership to leave to your children.  For example, if you’d like leave 25% of the property value to your children, your Home Reversion plan will be based on 75% of the property value, not its full value.

Although Home Reversion isn’t a particularly flexible product, if you later decide to move house, a Home Reversion plan can be transferred to a new property (although not to sheltered retirement accommodation) subject to terms and conditions.  However, if the new property is not acceptable to the Home Reversion provider you would have the buy the property back (or the provider’s share of it) at the FULL market value which could be very expensive and might not leave you with enough money to buy the new property.  Similarly, if you unexpectantly came into funds and want to end the Home Reversion, you’ll need to buy the property back (or the provider’s share of it) at the FULL market value. In this respect, ending a Home Reversion plan is not as straightforward as ending one of the mortgage based options.

HOME REVERSION INVOLVES SELLING PART OR ALL OF YOUR HOME TO A HOME REVERSION PROVIDER WHICH WILL REDUCE, POSSIBLY ENTIRELY, THE INHERITENCE YOU LEAVE TO YOUR LOVED ONES

LATER LIFE MORTGAGE – From age 50

Being a mortgage you will still own your home, and yes, the minimum age for a Later Life mortgage is age 50.

A Later Life mortgage has a maximum term of 40 years (conditional on the borrower(s) living in the property) and can be arranged on a Repayment basis, part Repayment and part Interest Only, or all Interest Only subject to the maximum Interest Only part of 50% of the property value and, typically, the property having remaining equity of £150,000.

The mortgage requires you to make monthly payments so the amount you can borrow is based on your current and retirement income.  For joint borrowers the mortgage must also be affordable following the death of one of the borrowers.

Normally you can choose between a variable interest rate and a 2 or 5 year fixed interest rate.  If you choose a fixed interest rate you may be able to choose a new fixed interest when your rate expires but this will be subject to availably at the time.

Typically, Early Repayment Charges apply during the first 2 or 5 years although overpayments of up to 10%pa during this period are permitted without incurring an Early Repayment Charge.  Once the Early Repayment Charge period has expired there are no restrictions on overpayments or paying the mortgage off.

If you later decide to move house the mortgage can be transferred to a new property subject to the lender’s criteria at the time.

You remain responsible for the maintenance and upkeep of the property at all times.

The mortgage is repayable on your death (second death if joint).  If you survive the maximum 40 year term the mortgage must then be repaid, either by selling the property or by an alternative Equity Release arrangement.  The mortgage must also be repaid if you leave the property. 

YOUR HOME MAY BE AT RISK IF YOU DO NOT KEEP UP INTEREST PAYMENTS ON A LATER LIFE MORTGAGE

RETIREMENT INTEREST ONLY (RIO) MORTGAGE – From age 55

Being a mortgage you will still own your home.  A RIO mortgage is very similar to a Later Life mortgage except that the minimum age is 55, the mortgage term is “for life” (or until the borrower(s) leave the property), and as the name suggests, the mortgage is arranged on an Interest Only basis.  Maximum borrowing is 50% of the property value subject to the property having remaining equity of, typically, £150,000.

The mortgage requires you to make monthly payments so the amount you can borrow is based on your current and retirement income.  For joint borrowers the mortgage must also be affordable following the death of one of the borrowers.

Normally you can choose between a variable interest rate and a 2, 3 or 5 year fixed interest rate.  If you choose a fixed interest rate you may be able to choose a new fixed interest when your rate expires but this will be subject to availably at the time.

Typically, Early Repayment Charges apply during the first 2, 3 or 5 years although overpayments of up to 10%pa during this period are permitted without incurring an Early Repayment Charge.  Once the Early Repayment Charge period has expired there are no restrictions on overpayments or paying the mortgage off.

If you later decide to move house the mortgage can be transferred to a new property subject to the lender’s criteria at the time.

You remain responsible for the maintenance and upkeep of the property at all times.

The mortgage is repayable on your death (second death if joint) or if you leave the property.

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Quick Reference Guide (PDF)

YOUR HOME MAY BE AT RISK IF YOU DO NOT KEEP UP INTEREST PAYMENTS ON A RETIREMENT INTEREST ONLY MORTGAGE