At times, the terms "equity release" and "lifetime mortgage" can seem interchangeable. But what is the actual difference?
Lifetime Mortgages are the most popular type of Equity Release as they allow you to retain homeownership, port (move) to a different home, make partial repayments, and draw additional pre-agreed funds in the future. Lifetime Mortgages make up over 99.5% of new Equity Release plans.
Now that we know lifetime mortgages are the most popular type of equity release, let's take a look at how lifetime mortgages compare with equity release as a whole.
In this guide, you will learn:
There are currently two types of equity release plan available to new applicants:
- Lifetime Mortgage
- Home Reversion Plan
Let's look at some of the key differences between them:
|Home Reversion Plan
|You retain full ownership of your property.
|The mortgage lender has a registered charge on your property.
|Yes - The same as a residential mortgage.
|No - You are selling part/all of your home.
|What is the maximum loan amount?
|Based on your age and your property value. Use our calculator to see your results.
|Based on your age and your property value. The maximum is similar to a lifetime mortgage
|Your eligibility is based on your income and expenditure? (affordability assessed)
|Mandatory monthly payments are required.
|Voluntary payments can be made.
|Minimum age of applicants.
|55 years old.
|60 years old.
|Maximum age of applicants.
|No maximum age.
|No maximum age.
|You have the right to live in your property for the rest of your life.
|Your interest rate is fixed.
|Yes for the lifetime of your mortgage.
|N/A - You are selling part/all of your home.
|Move Home When You Want
|Significant Life Event Exemption
For a full breakdown of these types of plans, you can read our guide on the different types of equity release" here.
Lifetime mortgages, the most common type of equity release, offer some excellent features to help with changing circumstances in the future.
- Transfer your plan to a new property (Porting)
- Downsizing protection
- Significant life event exemption
- Voluntary payments
Alternatively, home reversions offer few features, as they simply offer a lump sum of cash for a certain percentage of your home. They provide little flexibility and plan features to help with financial planning.
Can I transfer my equity release to a new property?
If you have a lifetime mortgage, you can transfer your equity release to a new home.
All lifetime mortgages will allow you to transfer your plan to a new property if the property meets the lending criteria at the time. We refer to this as "Porting".
You can read a guide on transferring your lifetime mortgage here.
However, you cannot transfer your home reversion plan to a new property. The reversion provider would request that you purchase their share of the property back at full market value. Often, this is considerably higher than the amount they offered to you, as it will be the percentage share they own at open market value.
Can I repay my equity release early?
You can repay your equity release whenever you wish. However, depending on the type of equity release, the amount to be paid back will be calculated differently.
With home reversion plans, you will have sold a percentage of your property. You will need to repay this at full market value, which could be considerably higher than the initial money you received.
If your property value has increased since you took the plan, the reversion provider will also benefit from the increase.
As with home reversion plans, you can choose to repay your lifetime mortgage at any point. The lender will request that you repay the initial amount you released plus any interest charges.
There may also be an Early Repayment Charge (ERC), usually a percentage of the amount you released.
Repaying your lifetime mortgage can be costly, but unlike home reversion plans, there are plan features to protect you against ERCs in some circumstances. The most important ones are downsizing protection and the significant life event exemption.
There are two types of downsizing protection, both with the same name but working differently.
The most common says: If you decide to move home after several years (most commonly three or five), you can repay the balance in full without incurring an Early Repayment Charge if the new property does not meet lending criteria.
Therefore, if you attempt to port your lifetime mortgage but are unsuccessful due to the new property details, the lender will allow you to repay it without incurring an ERC.
However, the more comprehensive type of downsizing protection allows you to repay the balance in full as part of moving without incurring an ERC. This protection is activated on the 5th anniversary of your plan.
There are plans available which have downsizing protection from day one of having your lifetime mortgage.
Significant life event exemption
The significant life event exemption allows you to repay the balance in full without incurring an Early Repayment Charge following the first borrower passing away or moving into long-term care.
Most plans with the significant life event exemption afford a 3-year repayment window without incurring an Early Repayment Charge.
This exemption can be an excellent protection to allow the surviving applicant to move home without restriction, repaying the equity release as part of the process.
Can I make voluntary payments towards my equity release?
You can make payments towards the most common type of equity release, lifetime mortgages, but usually not home reversion plans.
The reversion provider may offer you extra funds if, as part of the agreement, you make "rent" payments, but this will not reclaim the percentage of the property you have sold.
Lifetime mortgages are different. All new lifetime mortgages available on the market allow you to make voluntary payments without incurring an ERC.
They commonly allow you to make 10% overpayments yearly without additional costs. However, some plans offer up to 20% or even 40%.
You can read more about repaying your equity release in this article.
Equity release is not more expensive than a lifetime mortgage, as lifetime mortgages are a type of equity release. However, other types of equity release can be more expensive as the overall cost is impacted by how property prices perform over time.
The more property prices increase, the more home reversion will cost you, as the reversion provider owns a percentage of your property. However, if property prices crash, it could be more cost-effective if you have a reversion plan.
When comparing each product, we typically see lifetime mortgages being considerably cheaper if property prices continue to rise steadily.
During your conversation with an equity release adviser, they can guide you through choosing the most appropriate plan available.
I have built a helpful lifetime mortgage cost calculator, which shows you how interest charges accrue.
You could get more money with an equity release than a lifetime mortgage by using a home reversion plan. While selling 100% of your property, the highest amount a home reversion can offer is around 60% of your property. In comparison, the largest loan amount offered from a lifetime mortgage is currently 55% of the property value.
You may qualify for a medically enhanced plan with a lifetime mortgage if you have medical conditions. This may provide extra funds at a lower interest rate.
To find out the maximum amount of money that you can release, use our equity release calculator.
Lifetime mortgages are usually the best type of equity release plan currently available due to the protections and features they afford.
The alternative new type of equity release plan available, a home reversion plan, is only the preferred option in very limited places.
Both lifetime mortgages and other types of equity release plans are safe.
All equity release plans we recommend are governed and regulated by the Financial Conduct Authority (FCA). This is for both types of products: lifetime mortgages and home reversion plans.
The FCA states: "Financial markets need to be honest, fair and effective so consumers get a fair deal. Our role is to ensure markets work well for individuals, for businesses and for the economy as a whole."
The Equity Release Council also approves both product types. They provide extra safeguards to protect you.
One of the most important safeguarding features for lifetime mortgages is the "No Negative Equity Guarantee". This guarantee means the lender can never ask you to pay back more than what the property is worth when the plan ends.
So you are protected even if property prices crash or you live to be 150.
Although lifetime and residential mortgages are similar in many ways, there are some crucial differences to know, including:
|Voluntary payments allowed.
|Mandatory payments required - Your home is at risk of reposession if you do not make your commited mohtly payment.
|Yes - You must prove that monthly payments are affordable.
|The mortgage has no fixed term - It runs until you pass away or enter permanent long-term care.
|Fixed for a number of months/years. At the end of the term, you will have repaid the balance in full or will need to repay the outstanding balance.
As lifetime mortgages are not affordability-assessed, the lender will not request details of your income, expenditure, and unsecured liabilities (such as credit card debts). Instead, the amount you can release is primarily based on your age and property value.
However, your equity release adviser will likely go through your income and expenditure with you to establish the best way forward to meet your financial goals.
As the name suggests, lifetime mortgages are designed to run for the rest of your life, so they have no set term. The plan typically ends when the last borrower passes away or moves into long-term care.
On the other hand, a residential mortgage will always have a known end date.
Residential mortgages also require you to make mandatory monthly payments to cover the interest at a minimum (interest-only mortgages) or lower the capital (capital repayment mortgage).
Lifetime mortgages are very different.
They do not require monthly payments; instead, the interest will accrue over time. When the plan ends, the house is usually sold, and the initial loan amount, plus interest charges, is repaid.
Remember: Most lifetime mortgages allow you to make overpayments each year to cover the interest and reduce the capital if you wish.
Are there fixed interest rates for lifetime mortgages and residential mortgages?
Both lifetime mortgages and residential mortgages offer fixed interest rates.
However, residential mortgages normally only allow you to fix the interest rate for a few years. Most commonly, this is two, three, or five years.
After the fixed period, the lender will change this to a standard variable interest rate, which could be higher. Most people will go back to their adviser at this point to refix their mortgage interest rate.
On the other hand, lifetime mortgages offer fixed for-life interest rates. However, I still suggest reviewing your lifetime mortgage regularly with your equity release adviser to ensure no cheaper plan is available.
Let's take a look at these different products side by side.
|A Fixed Interest Rate
|Yes, but for a set number of years, typically two, three or five. Then placed onto a standard variable rate (SVR)
|Yes, your interest rate will be fixed for the life of your plan
|Mandatory Monthly Payments
|No, but voluntary payment options
|Set term with a known end full repayment date.
|No set term, runs for as long as you require.
|Maximum Loan Amount
|Affordability assessed, so will be based on your income, expenditure and liabilities.
|Based on your age and property value. The older you are, the higher the loan amount available.
|Retain Full Home Ownership
|Move Home When You Want
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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