What’s the difference between a lifetime mortgage and equity release?

Large old brick house with a black metal fence going around the outside

Equity release products are a way of releasing the value tied up in your home without needing to move out of your home.

They have grown in popularity in recent years, but may not be suitable for everybody.

In this article, we’ll take you through some of your options if you are considering equity release and wish to know the facts, and look at the advantages and disadvantages of the different options. 

If you are thinking about tapping into the equity that you have built up in your home, then it is extremely important for you to first think critically about what you need that money for and whether there are cheaper alternatives that you could also choose.

What is Equity Release?

The term equity release refers to a range of products that let you access the cash (otherwise known as equity) tied up in your home. They are eligible for people aged over 55, and in some types of products, aged over 60.

The equity in your home is the part of the overall value of your home which is yours, and doesn’t still have a mortgage attached to it.

You can apply for equity release when you are still paying a mortgage, or when you have finished. The money that is released can be given to you as a lump sum or in several smaller instalments. 

There are a couple of different ways you can release the equity in your home without being forced to sell it. The most commonly used type of Equity Release product is called a Lifetime Mortgage.

What is a Lifetime Mortgage?

This term refers to a type of loan taken out with your home as the security, and which is only repayable on your death. It is different from ordinary mortgages as there are no monthly repayments with a Lifetime Mortgage. The lender retains a percentage of your property until it comes to be sold.

How does it work?

With a Lifetime Mortgage, you take a loan that is secured by your own home, provided it is your main residence, and you retain ownership.

The home will remain yours, and you remain responsible for maintaining it. Interest is charged on what you have borrowed, and is added on to the total loan amount.

When you die, or go into a retirement home, or sell up for another reason, the house that you used to secure the loan is sold, and a set proportion of the house’s value goes directly to the lender of the Lifetime Mortgage. 

Type of Lifetime Mortgages

There are 2 main types of lifetime mortgages that you can choose from:

The interest roll-upthis is a type of Lifetime Mortgage where you receive the lump sum and then interest is added to the loan over the years until it is repaid, which only happens when the house is sold.

This, therefore, means that you do not have to make any regular repayments as you would with a standard mortgage. Interest gets ‘rolled up’ until such a time as the total amount owing is repaid when the homeowner sells, or dies.

Interest-paying mortgage In this case, you get a lump sum amount that you either make monthly or ad-hoc payments on to cover some or all of the interest on the loan. This can either reduce or stop the impact of the interest rolling up.

Some people choose this type of mortgage as they are concerned about the impact on their heirs of leaving a home with such a large amount of debt attached to it. But it is obviously only possible if you are in a position to be able to afford repayments. The initial capital still becomes payable when the house is sold.

Most people who take out an equity release product, opt for a Lifetime Mortgage. With a lifetime mortgage however, the debt mounts up quickly, which concerns many people.

In those cases, people therefore prefer to choose an Interest-paying mortgage. If you wish to know more about these different types of mortgage, it is best to speak to an independent adviser who can help you make a decision about which might be the better option for you.

Just as ordinary mortgage terms and interest rates carry from lender to lender, so too do lifetime mortgages so it’s best to shop around and compare prices before making a decision.

Things to Know

If you’re considering taking out a lifetime mortgage, you may find it useful to know these facts;

  • The minimum age you can take out a Lifetime Mortgage is usually 55. The earlier you take this product out in your life, the more it is likely to take from the overall value of your house when it eventually comes to be sold. 
  • The maximum percentage you can borrow is normally 60%, but this does vary depending on your age and the value of your property. The older you are, the more you are likely to be able to borrow. In addition, if you have a serious health condition, the lender is also more likely to lend you a greater amount.
  • Interest rates on Lifetime Mortgages are usually fixed. Where they are variable rates, they must have a cap on their upper limit which is then fixed for the life of the loan. 
  • The Equity Release Council dictates that no lender is allowed to remove you from the home. It remains yours for life or until you move out into a care home or other residence. 
  • There is a ‘no negative equity’ rule on equity release products which means that if when your property is sold, and all the agents’ and solicitors’ fees have been taken, the remaining amount is less than that which you owe to your loan provider, neither you nor your heirs if this happens after your death, will be liable to pay the difference. It simply gets cancelled.
  • You still have the right to move to another property if you have taken out an equity release product, as long as the new property is deemed acceptable for the loan provider to transfer your loan to. 
  • It’s important not to take the full available amount of equity in your home unless you absolutely need it all. Only take the amount you need and leave the rest in your home. It can always be taken out at a later date. This is because you pay interest on the total amount loaned and you don’t want to be accruing more interest than you absolutely need to be. 
  • Equity release can be expensive when compared to ordinary mortgages as you will be paying a higher rate of interest and the debt can grow very quickly if interest is rolled up. Because lenders have to factor in things like the ‘no negative equity’ rule, the fixed interest rate cap, and the fact there are no guarantees that house prices will continue to rise, equity release is a very expensive product. 

Conclusion

If you are thinking about tapping into the equity that you have built up in your home, then it is extremely important for you to first think critically about what you need that money for and whether there are cheaper alternatives that you could also choose.

Although a Lifetime Mortgage can be a great way to release money that is yours and benefit from a cash payment to spend on what you like, there are some big consequences for your future and potentially for those who you may wish to inherit from your estate. 

You also need to remember that if you take money from your property now, you may not have it available for other things such as retirement, or long-term care. If you are unsure whether equity release is right for you, then speak to an independent adviser for more advice and guidance. 

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