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What are the different types of equity release?

Article | Feb 2024

Equity release is a process used by lots of homeowners who want to take out tax-free cash from the value of their property. Releasing equity from your home can provide you extra funds to give an early inheritance, build an extension, fund a dream holiday and more.

There are different types of equity release product, and the most popular type is a Lifetime Mortgage. Responsible Life specialises in offering industry expert advice on the different ways to unlock your property wealth.

When it comes to Lifetime Mortgages, two main options might be available to you. The first option is the Lump Sum Lifetime Mortgage product. This means you will release a single lump sum from the value of your home. Your interest rate will be fixed for life.

The other option for a Lifetime Mortgage is the Drawdown product. Opting for this choice allows you to release a portion of your available equity upfront, keeping the remainder in an interest-free reserve. You can access funds from this reserve later by contacting your lender. As interest is only added to the amount of cash that you drawn down, it can be a great way to have control over the cost of equity release.

With both product options, you will benefit from the knowledge that you will never owe more than the value of your home. This means that you can release equity safe in the knowledge that your estate will never inherit any Lifetime Mortgage debt.

You are not just limited to a Lifetime Mortgage though. Responsible Life will provide advice on a full range of equity release options to help find the right choice for you. These include Retirement Interest-Only Mortgages, traditional mortgages, and downsizing.

What is a home reversion plan?

You may have also heard of home reversion plans. This is another type of equity release product, but it's very different from a Lifetime Mortgage.

With a home reversion plan, you are giving up all or part of your home to a provider, usually for a fraction of its market value. The provider will then own that share of your home, and you will have to pay them back when you die or go into long-term care. That means that the provider will benefit in any increase in market value for the share of the home that they own.

At Responsible Life, we think that home reversion plans are a bad deal for homeowners. That's why we don't offer them at all.

What are the benefits of each type of equity release?

With a Lifetime Mortgage you can make penalty-free voluntary payments if you wish to do so. You can also stop making these payments at any time if you have a change in financial circumstances. Our advisers can provide more information on how voluntary payments work.

Interest rates are fixed for life with a Lifetime Mortgage, allowing you to visualise exactly how the amount you owe will increase overtime. It can also allow for you to plan how and when you might make payments in the future.

You will also enjoy what is known as a ‘no-negative-equity' guarantee. This means that you will have peace of mind in knowing you will never owe more than your property is worth. You can also enjoy the flexible benefits of the Drawdown option, meaning that you can take out tax-free cash in stages when it is needed most.

Can you release equity in other ways?

Formal equity release products aren’t the only way to access some of the value held within your property. As mentioned, the act of releasing equity can also be achieved with other mortgage products, like a Retirement Interest-Only Mortgage.

The benefits of a Retirement Interest-Only Mortgage are that you can also borrow a tax-free sum, but you will only pay the interest each month. The full amount taken out is then repaid when you pass away or enter long-term care.

You can also take out a standard traditional mortgage, with the benefits of having options such as capital repayment and interest-only available.

Do bear in mind though that with these other mortgage products, payments are required in your lifetime. Your home may be at a risk of repossession if you miss these payments.

How much equity can I release?

It is important to be aware that you could only be eligible for equity release if you are a homeowner over the age of 55. The amount of equity release you can get will depend on your personal circumstances.

There are two main factors that impact the amount of money you can release from home. The older the age of the youngest homeowner, the more money you can get from equity release. Whilst the higher the value of your home, the greater the pool of equity that the calculation will be completed on.

It is easy to work out how much you could get with a Lifetime Mortgage. Simply try our free equity release calculator. If you provide a few details such as the age of the youngest homeowner and the value of your property, you’ll receive an estimate on what you could receive.

Take the next step to release equity

If you are interested in exploring what types of equity release could be the right choice for you, why not get booked in for your free initial consultation with one of our expert advisers? Complete a calculation today and get in touch with our Information Team who can help you to explore you eligibility and get a consultation booked in.

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