Which type of equity release is a good idea for me?

If you are over-55 and a home-owner then equity release can let you unlock some of the cash tied up in the value of your property. We explain the different types of equity release loans available.

Interest rates on equity release loans have been rising this year, making it more expensive to borrow money.

But if it’s done right, equity release could give you money that helps you live comfortably in retirement. From lifetime mortgages to reversion plans, we outline the options available to help you decide if equity release is right for you.

Below, we discuss:

• Equity release calculator: How much can I borrow?
• Different types of equity release
• How do lifetime mortgages work?
• What are home reversion schemes?

Read more: Our pick of best equity release providers

What is equity release?

Equity release is a type of loan that homeowners older than 55 can take out.

The loan is secured against your home and paid off when the property is sold, usually when you die or move into care.

Read our equity release guide for more information.

While it’s important to weigh up the risks and consider alternatives to equity release, for some homeowners it can be a good option. Bear in mind you have to take financial advice first.

Equity release calculator: how much can I borrow?

Get an idea of how much money you could unlock from your home with the calculator below.

What are the different types of equity release loan?

Equity release enables you to take value locked up in your property and turn it into ready cash without having to move. The two equity release options include:

• Lifetime mortgages
• Home reversion schemes

If you can afford monthly repayments, you could also tap into the value of your property without having to sell it by using alternatives to equity release, including:

• Remortgaging
• Taking out a retirement interest-only mortgage (RIO) 

We outline the alternatives to equity release.

For help on weighing up the pros and cons of each option, see: remortgaging or equity release: which is best?

Below, we discuss the main types of equity release.

1. Lifetime mortgages

These are the most popular form of equity release. Similar to a mortgage, you take out a loan secured against the value of your property – normally, up to 60%.

Usually, you don’t make monthly repayments. Instead, the unpaid interest is added to your loan which rolls up over time and increases the size of your original debt (although it can never be more than the value of your home).

You still own your home and can continue living there until you go into long-term care or die, when the property will be sold to repay everything that you owe.

You must be over 55 years old to take out an equity release product. The amount you can borrow depends on:

• your age
• the value of the property
• in some cases your state of health.

Is a lifetime mortgage the same as equity release? 

Yes, it is a form of equity release. You can choose between several different types of lifetime mortgage, with different features to suit your circumstances.

Lump-sum lifetime mortgage

A lump-sum lifetime mortgage provides you with a lump-sum of money and can work well if you need a large amount for a specific purpose and can’t raise it elsewhere, such as:

• For clearing an existing mortgage
• Passing on money to family
• Converting your home to cope with mobility issues.
• Buying another property, such as a holiday home or buy to let

However, it doesn’t make sense to release a large amount and just stick it in a savings account for a rainy day. The interest that racks up on the lifetime mortgage will be far more expensive than anything you can earn on money stashed in a deposit account.

A savings balance can also affect your entitlement to certain benefits.

Drawdown lifetime mortgage

A drawdown lifetime mortgage gives you the flexibility to tap into money from your home as and when needed, rather than taking out a large lump sum at the start. 

You agree with the lender on the total amount that can be withdrawn. You then take a smaller initial amount and “draw” further money in future as and when you like. 

The advantage is that interest is only charged on the money you actually withdraw, so the debt mounts up slower than if you had taken out a whacking great sum at the start. This means there may be more of the value of your home left for your family when you die.

You can also adapt how much you take out depending on your changing needs in retirement, and you may not miss out on means-tested benefits.

Interest-only lifetime mortgage

The difference with an interest-only lifetime mortgage is that you make monthly repayments, to clear some or all of the interest.

If you pay back all the interest every month, the debt won’t roll up beyond the original amount borrowed. So you can leave more of the value of your home to your beneficiaries. 

This form of equity release may appeal to those who can afford repayments each month but can’t get a traditional mortgage in retirement. Unlike a standard mortgage, you won’t have to pass income or affordability checks.

If you opt for a flexible interest-only lifetime mortgage, you could potentially change or even stop repayments in future if your circumstances change.

What are the pitfalls of lifetime mortgages?

The main pitfall of a lifetime mortgage is the cost. Interest rates on equity release are typically more expensive than on ordinary mortgages or interest-free credit card offers.

If the interest isn’t paid off each month, it will roll up over the years and could swallow the whole value of your home, leaving less for long-term care costs or for your loved ones to inherit. 

Equity release money could also stop you getting means-tested benefits, such as pension credit and council tax support. 

And if you later wished to move home, you could:

• Run into problems transferring your equity release scheme to a cheaper property
• Be forced to clear the debt, plus accumulated interest
• Potentially, you may face early-repayment penalties

Check out 10 alternatives to equity release if you’re not sure whether it is the right choice for you.

2. Home reversion schemes

Some or all of the value of your home is sold to an equity release provider for less than its market value. In exchange, you get a lump sum or a regular income and you can stay living in your home, rent-free, for the rest of your life.

You must agree to keep the property in good repair. When it is sold, the proceeds are split between you and the equity release company based on the percentage you both own.

Similar to other equity release schemes, the amount you receive depends on the value of your home, your age and your state of health.

Below, our free online equity release calculator* can give you an indication of how much equity you could release from your home with either a lifetime mortgage or home reversion scheme.

Home reversion plan v lifetime mortgage: which should I choose?

Home reversion plans and lifetime mortgages both let you tap into the value of your home releasing tax-free cash while still living there. Typically you don’t have to make monthly repayments.

Lifetime mortgages are available from the age of 55, whereas home reversion plans may only be offered once you reach 60 or 65 – it depends on the provider.

• Lifetime mortgage = a loan, where interest is charged
• Home reversion plan = selling some or all of your property to the plan provider

With a lifetime mortgage, the unpaid interest gets added to your loan balance, and then extra interest is charged on top. Over the years, the total debt can increase to more than you borrowed.

If your lifetime mortgage is from a member of the Equity Release Council, there is a “no negative equity” guarantee, which means that you or your beneficiaries will never have to pay back more than the value of the property when it is sold – but there might be nothing left over. 

With a home reversion plan, you won’t face mounting interest. However, it does involve selling some or all of your home for less than it would fetch on the open market, usually for only 20% to 60% of its true value.

You may be able to buy back the rest of your property if you change your mind later – but you will have to pay whatever the full market value has reached.

If house prices soar in the years after signing up for a home reversion scheme, the equity release company could end up selling its stake for tens or even hundreds of thousands of pounds more than you received.

Home reversion schemes can provide greater certainty about leaving part of your property to your family. However, they can also end up being far more expensive than lifetime mortgages.

So what’s the best type of equity release? 

The best type of equity release will depend on your own needs and circumstances. 

A lump-sum lifetime mortgage might be a good way to clear an existing mortgage, for example, while the drawdown version could help top up your income without running up hefty interest costs.

Meanwhile, an interest-only lifetime mortgage could be a life-saver if you want to stay in your own home and can afford monthly repayments, but have been turned down for a standard mortgage due to your age. 

See the best equity release companies for our guide to the best providers.

However, you should always consider other ways to raise the money first. Seek independent financial advice and talk to your family before opting for equity release.

The best way to release equity from your home may well be moving to a smaller house or less expensive area. This is cheaper and less complicated than signing up for an equity release scheme.

And if you downsize sooner rather than later, you may have more energy and enthusiasm to cope with the move – and have more money left for care fees or to pass onto your loved ones.

Still unsure bout equity release? Our video below helps explain how it works.

*All products, brands or properties mentioned in this article are selected by our writers and editors based on first-hand experience or customer feedback, and are of a standard that we believe our readers expect. This article contains links from which we can earn revenue. This revenue helps us to support the content of this website and to continue to invest in our award-winning journalism. For more, see How we make our money and our Editorial promise.