Introduction to Three Types of Equity Release

Published / Last Updated on 11/10/2023

Equity Release should only be considered if you have a specific need for equity release, you are over the age of 55, you have no mortgage or plan to pay off your mortgage or other debts with equity release and you have exhausted other routes to raise capital or you plan to spend the funds on boosting your income or home improvements or spend it on holidays, cars and other lifestyle improvements.  You should not release equity if you are simply planning to put this in the bank given the interest you may pay on your equity release scheme may be greater than the interest earned in saving it.

You may wish also to consider equity release as an estate planning tool to reduce the value of your estate e.g., gift monies to children for a deposit to buy their own property (grows tax free), survive 7 years and then the gift is inheritance tax free and finally, and leave your pension funds untouched as currently you may pass your pension fund on death (below age 75) tax free to your loved ones.

Fundamentally there are three basic types of equity release scheme:

Retirement Interest Only Mortgage (RIO): 

  • This where you borrow money from an equity release provider and you only pay the interest on the debt, much on the same way as an interest only mortgage.
  • You will be underwritten to check and ensure that you have enough pension income to meet interest payments.
  • Your debt should not increase if you meet payments and may help you to maintain and increase equity in the future if you decide to downsize or sell.
  • Your debt is then repaid either when you die or when the property is sold if you move into a care home.
  • There are usually penalties for the whole period or for a set number of years if you choose to pay off the debt but as the debt will not have increased, your exit penalties are known and remain stable.

Lifetime Mortgage: 

  • This is where you borrow money via equity release and the interest charged on the debt is never paid.
  • The interest rolls up over the years giving you an even bigger debt as interest will then be charged on interest.
  • You should expect your equity release debt to double every 10 years or so.
  • Do not be troubled by this as the value of your home and your equity will usually increase at a faster rate than the lifetime mortgage debt.
  • In short, you should still maintain and have even greater equity than you did in the years to come.
  • The debt repaid when you die or when the property is sold if you move into a care home.
  • There are usually penalties for the whole period or for a set number of years if you choose to pay off the debt and as the debt will have increased, your exit penalties may increase and it may be more difficult to get out of the equity release scheme.
  • This is the most common form of equity release.

Home Reversion: 

  • This is where you sell a share or the whole of your home for a monetary figure.
  • You will no longer own the share in your property that you have sold.
  • When property prices increase and the value of the property and equity in it increases, when sold, you will not get the full value of the equity but the equity of your share only and the equity release company receives their share.
  • This is not a common form of equity release although many people who are single and have no family to leave their estate to consider this route as they may as well have the luxury of remaining in their home for the rest of their lives and have some fun with additional money on the way.

You should only consider equity release if you seek full, independent financial advice on your suitability for this type of scheme as it is may more difficult to get out of the scheme if it proves expensive or if the debt is much higher than you when you started equity release.  Always take advice.

Contact  Call Back  Calculators  Our Fees


Related Videos


Videos Channels

Explore our Site

About
Advice
Money MOT
T and C