As noted in Part 1, there are two main types of equity release
product: lifetime mortgages and home reversion plans. This blog discusses
lifetime mortgages. (Read Equity Release: Everything You Need To Know: Part 3 to
learn about home reversion.)
There are two main types of lifetime mortgage:
Here, borrowers receive a lump sum secured against the value of their
property. They pay monthly interest on the loan & can pay it off if ever
they decide to sell the property.
The interest rate may be fixed or variable. But if it is variable, and the
borrower’s pension or other source of income is fixed, they will find it more
difficult to meet their repayments if interest rates rise.
To avoid this problem, most borrowers invest the money they borrow, often in
an income annuity. They use the income to pay the interest on the loan, and
what is left over is theirs to spend. But because annuity rates are low and
depend on your age, this type of loan is really only suitable for very elderly property owners.
(2) Rolled-up interest loans
With this loan, a lender provides a lump sum or a monthly income (or both),
based on the value of a borrower’s home. Nothing is repaid until the
borrower dies or the property is sold, but annual interest is added to the
amount borrowed. This is ‘rolled up’ over the life of the loan.
The value of a borrower’s home and their age will determine how much they can
borrow. The older they are, the greater the percentage of their home’s value
they can borrow.
As above, the interest rate on the loan may be fixed or variable. If it is
variable, it could also be capped, which means it cannot go above a certain
Sometimes property loses value during the loan period. Most lenders offer a
‘no negative equity’ guarantee to cover this situation. This means that the
amount a borrower pays back to the lender will never be more than the value of
Always seek advice from a
solicitor &/or independent financial planner
before investing in an equity release scheme.
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