Lifetime mortgage vs equity release

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 is 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?

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 pay off existing debts, help your family or simply boost your finances later in life.

To be eligible for a lifetime mortgage you must be aged 55 or over with a property worth at least £70,000. You can access up to 59% of your home's value at a fixed interest rate.

There are two types of lifetime mortgage from which you can choose, depending on how you want to receive your funds:

1. A lump-sum lifetime mortgage, with which interest accrues on the full amount from day one.

2. Following an initial release, further amounts are 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. 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 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.
 

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 in return for a cash lump sum. You won't get the full market value of your home, as providers want to protect themselves against the risk that your property falls in value before it is sold.

You'll no longer be the legal owner of your home but you can continue to live in the property until you or the last remaining applicant pass away or move into long-term care.

When the plan comes to an end, usually the property is sold and the reversion company takes its share of the sale proceeds.
 

What's the difference between a lifetime mortgage and a home reversion plan?

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. 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, you'll never owe more money than the value of your home with the no negative equity guarantee.

• Ownership

You don't keep legal ownership of your home with a home reversion plan, whereas you do with a lifetime mortgage. 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.
 

What are my other later life finance options?

Before going ahead, your equity release adviser will discuss your alternative options.

• Home reversion plan
• Retirement interest-only mortgage
• Later life residential mortgage
• Interest-payment lifetime mortgage
• Downsizing
• Unsecured lending
• Using existing assets
• Support from friends or family
• Or check is equity release right for me?
   

Speak to one of our advisers

Both types of equity release have their advantages. Speak to one of our equity release experts to find out more about your available options.

At Key, we're passionate about helping you to live the later life that you want. We're proud members of the Equity Release Council, so our lifetime mortgage plans come with a no-negative-equity guarantee, and our personal and supportive approach has helped us to earn an 'Excellent' rating on Trustpilot through more than 17,000 customer reviews.

If you'd like to discuss whether a lifetime mortgage could be right for you, call our team of experts on 0808 252 9170 or request a call back with our online form. Alternatively, use our lifetime mortgage calculator to quickly find out how much you could release.

Benefits & Potential drawbacks of Equity Release

Benefits

• You can unlock cash from your home, tax-free, to help meet your needs in later life
• You’ll always retain full ownership of your home and can stay in it for as long as you wish with a Key lifetime mortgage
• You can choose to make reduced or no monthly repayments to suit your circumstances
• You’ll never owe more than your home’s worth with a Key lifetime mortgage
• You may be able to remortgage your plan in the future to release further funds or secure a better interest rate, although this isn’t guaranteed and may be subject to early repayment charges

Potential drawbacks

• A lifetime mortgage is a loan secured against your home and subject to compound interest, meaning the amount you owe can grow quickly
• Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits
• Equity release may leave you with limited or no property equity remaining
• Equity release will reduce your financial options in the future
• A lifetime mortgage is a long-term financial product and is not designed to be fully repaid until the death or entry into long-term care of the last remaining borrower, otherwise early repayment charges may apply

Equity release costs

Knowing the costs associated with equity release and how to help manage them is important.

Here are some helpful guides to give you a better understanding:

Compound interest explained
Lump sum vs drawdown lifetime mortgage
What does equity release cost?
 

Things to consider

Equity release - lifetime mortgages

• All our equity release advice relates to Key lifetime mortgages only - a loan secured against your home
• Equity release will reduce your estate’s value and may affect your entitlement to means-tested benefits
• A lifetime mortgage may result in limited or no property equity remaining and will reduce your financial options in the future
• You should always think carefully before securing a loan against your home to repay existing debt
• The loan, plus compound interest, is typically repaid through the sale of the property when the last remaining applicant passes away or moves into long-term care
• £1,299 advice fee only payable on completion