What is the Difference Between Equity Release and a Lifetime Mortgage?
Equity release means borrowing money against the value of your home, and if you are a homeowner over the age of 55, there can be many good reasons why you might consider this. It can help you to afford to make renovations to your property, provide you with any funds you need in an emergency, or simply enable you to be more financially comfortable during your retirement.
There are two main types of equity release, which can make things confusing. Even if you understand the fundamental differences, you may not be certain whether either option is right for you, based on your financial situation. Here, the property conveyancing experts at Clough & Willis Solicitors will explain how equity release works, discuss who it is most suitable for, and answer the question: “What is the difference between equity release and a lifetime mortgage?”
The simple answer is that a lifetime mortgage is only one type of equity release, and the latter term also includes home reversion plans. There are important things to understand about both types of equity release, as we will explain below, including how they are structured, how they are paid back, and what types of homeowners they are suitable for.
What is a lifetime mortgage?
A lifetime mortgage is a financial product aimed at those over 55, which enables them to borrow money against the value of a house that they own, while retaining ownership over the property until they die, or until they move into permanent care. Once the property owner has died or moved permanently into care, the house is sold in order to clear the debt and any interest, although, in some cases, homeowners are able to make earlier payments. It is often advisable to make early repayments because of the ways in which interest accumulates, but we will explain this in more detail below.
You do not need to own your home outright in order to benefit from equity release. Instead, the amount of equity you can release is equivalent to the value of your property (as assessed by an independent surveyor when you apply for equity release) minus the value of any outstanding mortgage. In most cases, it is likely that your home will have increased in value over time, which can mean that the amount of equity you can release from your home under a lifetime mortgage is more than your initial mortgage was worth.
One of the most important things to be aware of is that the more money you borrow against the value of the house, the less will be left over once the property is sold. If you have a family and want to give them an inheritance when you pass away, you should remember that a property often represents the largest share of an estate, and if a large portion of the property’s value goes towards paying off your debt, the estate that is inherited by your loved ones might be significantly smaller - even in cases where the money you borrowed has not been spent and is still part of the estate.
How does interest work with a lifetime mortgage?
In most cases, interest rates for lifetime mortgages are fixed, which makes it easy and convenient to plan ahead. However, it is important to assess each lifetime mortgage product on its own terms, and to understand how interest could compound over time to make this an expensive way of releasing money from your home.
You can either release equity as a lump sum, in which case, you will accumulate interest on the entire sum at once, or simply take the money as and when you need it. Under the latter circumstances, you will only owe interest on the money you have drawn out and will not need to pay interest on the total lump sum until you withdraw from it.
If you don’t make repayments on a lifetime mortgage, interest can stack up quite quickly and in some cases could end up greater than the value of the house, which can cause significant financial problems for any next of kin you leave behind. In all cases, taking out a lifetime mortgage will reduce the value of your estate, which means you’ll have less money to leave to your loved ones when you pass away. However, in most cases, there will be a limit on how much of the mortgage you pay back each year, so this is important to take into consideration when planning your finances.
What is a home reversion plan?
A home reversion plan is a different form of equity release. It enables you to sell all or part of your home to a third party, although, as with a lifetime mortgage, you can continue to occupy the house until you pass away. The third party may offer you a lump sum, or a regular income, in exchange for a portion of the equity of your house.
Once the house is sold, this company will take a share of the profits according to how much of the home you sold to them in the first place - for example, if you sell 50% of your home in exchange for £75,000 in cash, the home reversion company would be entitled to 50% of the proceeds from the sale of your property after you pass away.
For advice on whether a lifetime mortgage or home reversion plan is the right decision for you, speak to the property conveyancing experts at Clough & Willis. You can call us on 0800 083 0815, or fill out our online enquiry form to arrange a call back.