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:
(1) Interest-only mortgages
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 level.
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 their home.
Always seek advice from a solicitor &/or independent financial planner before investing in an equity release scheme.