There are two primary equity release products: home reversions and lifetime mortgages. While home reversions were once incredibly popular, they have quickly been surpassed by lifetime mortgages. This is due, in large part, to the fact that lifetime mortgages have grown in the number of features and enhancements available, making them attractive to homeowners.

However, home reversion plans still offer the same advantages they always did and do still work for a specific subset of homeowners, namely those most concerned with interest roll-up and leaving an inheritance to loved ones.

Home Reversion

Unlike a lifetime mortgage, a home reversion scheme is not a loan. Instead, you sell off part or all of your property, in exchange for a lump sum payment, or several smaller lump sum payments. These plans were originally introduced to help homeowners safeguard a portion of their home for inheritance purposes.

The lender keeps the percentage of the home you sold to them, which means you do not retain full ownership of your property. You do, however, get to remain living in the home rent-free until you either pass away or move into long-term care, at which time the home is sold. When the home is sold, the proceeds are divided according to the ownership percentages. So, for example, if you sold off 30% of the property, the lender would receive 30% of the proceeds and your estate would receive your 70%. The proceeds returned to your estate would be given to your beneficiaries, hence why this plan works well for safeguarding an inheritance.

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Lifetime Mortgage

Unlike a home reversion, a lifetime mortgage is a loan that you secure against your property. You receive a lump sum payment, or in some cases, you can drawdown payments in smaller increments, and your debt is repaid upon the sale of your home. Unlike home reversion plans, you retain full ownership of your property. You do get to stay living in the home without having to pay rent, similar to the structure of a home reversion plan.

With lifetime mortgages, there are a slew of potential product options. The most basic lifetime mortgage, the lump sum plan, is the core product available and it is the most straightforward of all schemes. You receive a lump sum payment and the interest accrues on your balance and rolls up. When your home is sold, your debt is repaid. In the meantime, you do not need to make any repayments.

Lifetime mortgages have expanded exponentially in the last several years, with different features available. In addition to the lump sum scheme, other plan structures are available in the plan types below.

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Drawdown Lifetime Mortgage

With a drawdown lifetime mortgage, you still receive a lump sum payment but instead of having to take the full amount in one payment, like with a lump sum plan, you can keep some of your equity release in a cash facility.

This has a couple of advantages, the largest of which is that you can avoid some of the impact of interest roll-up. With all lifetime mortgage products, you only ever incur interest on the cash that you have released. So, with a drawdown plan, you will start to pay interest on the initial amount you receive but you will not pay interest on the amount in the cash facility until you withdraw it.

The drawdowns from the cash facility are typically much smaller than your original lump sum payment and you do not incur any administrative fees when you make a withdrawal. You typically receive the withdrawal payment(s) in just a matter of weeks.

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Interest-Only Lifetime Mortgage

With an interest-only scheme, you make repayments against your loan balance. You repay the interest that accrues on a monthly basis. If you pay the full interest amount, your balance will stay level with what you originally borrowed.

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Voluntary Repayment Lifetime Mortgage

A voluntary repayment plan functions just as it sounds. You can make ad-hoc payments against the balance of your loan. Depending on your lender, there is typically a cap on how much you can pay each year but if you make that maximum payment every year, you’ll likely be able to pay off your loan sooner than anticipated.

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Ill-Health Lifetime Mortgage

An ill-health, or enhanced, lifetime mortgage is available for those homeowners who have specific health conditions or have made particular lifestyle choices that decrease their life expectancy. This decreased life expectancy can lead to a higher maximum release or a lower interest rate, depending on the equity release provider.

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