Types of equity release

Last updated 19^th December 2024
8 min read

As a homeowner, you’ll know that there can be value in your property.

Equity release can allow you to unlock cash from your home’s value. This money can be used for home improvements, or for a more comfortable retirement. In fact, you can use it for anything you like. Depending on the plan you choose, you can release the money as a lump sum or in smaller instalments.

There are different types of equity release schemes. Some of them may be more suitable for you than others. Because it’s a loan that’s linked to your home, it’s important to make sure you understand your options before considering equity release.

This guide explains the different types of equity release. We’ll look at the pros and cons of each type, giving you a better idea of which might be right for you.

Need an introduction to equity release first? Take a look at our other guides:

• What is equity release?
• Remortgage or equity release?

Types of equity release schemes

There are two main ways to release the equity tied up in your home without having to move.

A lifetime mortgage is a type of equity release scheme where you borrow money against the value of your home.

A home reversion scheme allows you to sell all or part of your property in exchange for money.

We look at the two different types of equity release in more detail below. Remember, you should discuss equity release with an expert adviser before making decisions relating to your home and its value.

Equity release type 1: Lifetime mortgages

A lifetime mortgage is a loan for an agreed amount of tax-free money secured against your home. As long as the equity release scheme you choose adheres to Equity Release Council (ERC) standards, you still own 100% of the property. You won’t need to make monthly repayments on the equity you release. (Although some schemes do let you make repayments so you can reduce the amount you owe.)

Instead, the money you borrow – and the compound interest – is paid back when you die or move into long-term residential care. Any money left over once the loan has been repaid will go to your estate.

To be eligible for this type of equity release, you must be:

• Aged 55 or over
• The owner of a qualifying UK property worth £70,000 or more (although this varies depending on the provider)

Types of lifetime mortgage

There are different types of lifetime mortgage and a range of features to choose from. It’s important to sit down with your adviser to determine which type is most suitable for you.

Here’s a quick overview of the different types of lifetime mortgage equity release. You can also take a look at our in-depth overview of lifetime mortgages to find out more.

Roll-up

You will get a cash lump sum with no monthly repayments. The loan amount and interest is paid off by the sale of your home when you die or move into long-term care.

Drawdown

A drawdown lifetime mortgage gives you the option to release your cash over time. You can choose to access it as and when you need it, rather than taking one lump sum. This helps to keep the interest down.

Flexible

With a flexible lifetime mortgage, you receive a cash lump sum. You also have the choice to make voluntary payments to reduce the equity release loan amount over time.

Enhanced

This type of equity release is only for those with specified medical conditions. It allows you to unlock more cash and access better mortgage rates.

Inheritance protection

This equity release option protects a portion of your home's value. This ensures it's always there to leave an inheritance for your beneficiaries. You'll usually pay a premium, and the maximum amount of equity you can release will be lower.

Interest-only

An interest-only lifetime mortgage gives you a cash lump sum. With this type of equity release, you can pay off a certain amount of the interest monthly. This helps to reduce the amount of interest you pay and retain more value for your estate.

Lifetime mortgage: important risks and considerations

A lifetime mortgage can be a relatively safe type of equity release. But there are certain things that may make it more or less suitable for you.

House price fluctuations

Products that adhere to Equity Release Council standards are protected by a ‘no negative equity guarantee’. This means you'll never owe more than the value of your home.

But, as house prices go up and down, you can’t predict how much of your home’s value will be left for your estate once you die. Releasing equity may mean there’s limited or no property equity remaining. It will also reduce your financial options in the future.

If you want to leave an inheritance for your family, discuss this with your adviser. They'll be able to show you equity release options that guarantee an inheritance.

Interest on lifetime mortgages

Lifetime mortgages usually have a fixed rate of interest. But products with a variable rate are available.

Most lifetime mortgage schemes calculate interest annually. The interest is added to the initial sum that you borrowed. (This is known as ‘roll-up’ compound interest). It could be a good option if you don’t want to make monthly payments.

If you'd prefer to keep the interest down, there are lifetime mortgage schemes that let you to pay off interest each month. Learn more about interest rates on equity release.

Early repayments

You don't have to make monthly repayments on a lifetime mortgage. But some equity release products do let you make repayments to reduce the total cost of borrowing.

If you decide to pay off the loan, you may incur early repayment charges. In some cases, this may be more expensive than the initial loan and interest. Be sure to check the early repayment terms with providers when choosing which equity release plan is best for you.

Eligibility for means-tested benefits

Equity release could affect your eligibility for any current and future means-tested benefits. Your equity release adviser will take you through whether or not this will affect you.

Equity release type 2: Home reversion

A home reversion scheme lets you sell part or all of your home to the equity release provider. This is in return for a tax-free lump sum or regular income.

Your provider will pay below market value for your home. This is usually between 20% and 60% of its true value. You keep the right to live there rent-free until you die or move into permanent care.

When this happens, your home will be sold and you or your estate will receive the value of your share. This means you’ll know exactly what percentage of your home’s value will be left to your estate on your death.

To be eligible for this type of equity release, you must be:

• Aged 60 or over (although for many plans you must be 65+)
• The owner of a qualifying UK property worth £80,000 or more

Home reversion: risks and important considerations

As with any type of equity release, there are things to take into account before considering a home reversion scheme.

House price fluctuations

If the value of your home has risen by the time it's sold, you or your estate will only benefit from the increase in your remaining share of the property. You won’t have a claim to any profit made on the portion owned by your equity release provider.

With a standard mortgage, or when you own your own home, you benefit from the profit across the entire value of the home when property prices increase. But with equity release, the provider pays below market value for their share of the equity. This can end up being less profitable than selling your home outright.

Early sale

If you die or move out permanently shortly after taking out a home reversion plan, you or your estate can lose out financially. This is because the equity release provider pays much less than market value for their share of your home.

Certain plans do provide some protection against this. But this type of equity release plan can be much less cost effective than a lifetime mortgage in some circumstances.

What's the difference between a lifetime mortgage and home reversion plan?

There are two major differences between a lifetime mortgage and a home reversion plan:

Home ownership

With a lifetime mortgage, you still own 100% of your home. With a home reversion scheme, you sell all or part of your home to the equity release provider.

Both options let you keep the right to live in your home until you die, sell the property or move into permanent care.

Interest payable

With a lifetime mortgage, compound interest builds up over the years. This can quickly increase the amount owed, as you’re paying interest both on the loan and on any interest that’s already added to it.

With a home reversion scheme, there's no interest to pay or repayments to be made. The provider allows for interest in the price they pay for the share you sell them. And you continue to live in your home rent-free.

Which type of equity release is right for me?

Your circumstances will dictate which type of equity release scheme (if any) is the most appropriate.

Start by considering which of the following factors are the most important for you:

• Receiving a cash lump sum
• Receiving regular payments
• Lower interest rates
• Fixed interest rates
• Lower overall cost of borrowing
• Flexible repayment options
• Retaining ownership of your home
• Providing an inheritance for your family
• Getting the best value from your equity

Decide which of these are most important to you. Then revisit the sections above on the different types of equity release scheme. This should help you consider your options.

All types of equity release products will reduce the value of your estate. This could leave you with limited or no property equity remaining, and will reduce your financial options in the future. It could also affect your eligibility for means-tested benefits.

You should always discuss your options with an experienced adviser. They can help you choose the right equity release type for you.

Alternatives to equity release

Equity release isn’t right for everyone. There are other ways you could raise funds for later life. For example:

• You could downsize by moving to a smaller, cheaper property
• You could consider taking out an unsecured loan or remortgage
• You could put any savings or investments you have towards your retirement fund
• Could a family member or friend give you financial support?

It’s best to seek expert financial advice to help you decide what’s best for your financial situation.

Getting advice

The information in this article is for general guidance only. It's not offering financial advice.

It’s important to get professional advice for financial decisions relating to your home. Your property is a valuable asset, and probably forms a significant part of your estate. So any decisions about this should be carefully considered.

When it comes to the different types of equity release, you'll have to discuss your options with a specialist financial adviser, a solicitor or both. These conversations will help you to decide which scheme, if any, is the right option for you.

Next steps

If you want to learn more about equity release, here are some other articles that our customers found helpful:

• Is equity release safe?
• How much equity can I release?
• Remortgage or equity release?

You’ll also find more information and in-depth resources on our equity release page.