What is the difference between equity release and a lifetime mortgage

If you want access to some of the funds that are locked up in your home, there are a number of different financial products from which you can choose.

You've likely heard of the terms 'lifetime mortgage' or 'equity release' but may be uncertain about what they mean and which option could be right for you.

In this guide, we'll clear up the confusion and help you to compare your options.
 

Is a lifetime mortgage the same as equity release?

Yes, a lifetime mortgage is a type of equity release.

Equity release is a financial arrangement that lets you unlock some of the funds tied up in your home. A lifetime mortgage is a type of equity release – but it isn't the only one.

We'll examine lifetime mortgages and the other type of equity release, known as home reversion, in the following sections.
 

What is a lifetime mortgage?

A lifetime mortgage is a type of loan that lets you borrow money against the value of your home. It can help you to release some of the money that you've built up into your home over the years. You can use the funds to help boost your finances later in life.

To be eligible for a lifetime mortgage you typically must be aged 55 or over with a property worth at least £70,000.

There are two ways you can release funds through a lifetime mortgage from which you can choose, depending on how you want to receive your funds:

1. A lump-sum lifetime mortgage, where you release funds as a single amount, and interest accrues on the full amount from day one.
2. Following an initial release, further amounts can be released, this is called a drawdown lifetime mortgage, with which interest only accrues on the money that you release. Further drawdowns are not guaranteed and will be subject to the fixed interest rate at the time money is released. With both options your home still belongs to you and you're free to continue to live in it.

A plan will normally end when you or the last remaining applicant pass away or move into long-term care. At the end of the plan, your home is typically sold, with the loan and any rolled up interest repaid using the proceeds. Any remaining funds are passed to your estate. However, you also have the option to start paying back the loan with voluntary repayments, subject to criteria - or with mandatory repayments for some products, if this is the most suitable option for you.
 

What's the other type of equity release?

The other type of equity release is called a home reversion plan; it's usually for people 65 or over.

In this arrangement, you sell all or part of your house to a reversion company, for less than market value, in return for a cash lump sum, regular income, or both.

You'll no longer be the legal owner of your home but you remain as beneficial owner of your home with a guaranteed lifetime lease to continue to live there until you or the last remaining applicant pass away or move into long-term care.

There's no interest to pay on the money released and no monthly payments to make. When the plan comes to an end, usually the property is sold and the reversion company takes its share of the sale proceeds.
 

Home reversion plan vs lifetime mortgage: What’s the difference?

Both types of equity release give you access to funds based on the value of your home and let you continue living in your home. There are a few key differences between them for you to consider, though.

• Interest

A lifetime mortgage is a type of loan whereas a home reversion plan involves selling all or part of your property to a reversion company and therefore there is no interest to pay - as it is not a loan. Lifetime mortgages involve compound interest that accrues based on the funds that you borrow.

A lifetime mortgage is a loan secured against your home and subject to compound interest, meaning the amount you owe can grow quickly – but taking out smaller amounts with a drawdown lifetime mortgage or making voluntary repayments could help you to manage the size of your loan. If your chosen provider is a member of the Equity Release Council like us, you'll never owe more money than the value of your home with the no negative equity guarantee.

• Ownership

With lifetime mortgages we recommend, you remain the legal owner. You don’t keep legal ownership of your home with a home reversion plan. However, you’ll benefit from any increases in the value of your property on any unsold percentage. Since you sell all or part of your home with a home reversion plan, things can become difficult if your circumstances change.

• Inheritance

With a home reversion plan, your estate will receive a fixed percentage of your property's final sale price when you die, if you did not sell 100% of your home. With a lifetime mortgage, the loan plus accrued interest is repaid to the lender - and the remainder, if any, goes to your estate.


Be financially aware
Lifetime mortgages are secured loans. Compound interest means the amount you owe can grow quickly. Equity release reduces your estate's value and may impact means-tested benefits. It may leave little or no property equity, reducing future financial options.
 

Speak to one of our advisers

If equity release isn't right for you, we'll tell you. Our expert advisers research all your later life options to help find one to meet your needs.

All our equity release advice relates to lifetime mortgages - a loan secured against your home. Our fixed advice fee of £1,699 is only payable on completion of a plan.

Speak to one of our equity release experts to find out more about your available options on 0808 252 9170 or request a call back with our online form.