How Does Equity Release Differ from a Regular Mortgage?

In short: Equity release lets you access your home’s value without making monthly repayments, while a regular mortgage requires regular repayments. Both options involve borrowing against your property, but they differ significantly in terms of how and when you repay the loan. Equity release carries risks, including losing a significant amount of your property’s value.

Key Differences Between Equity Release and a Regular Mortgage

Equity release and regular mortgages are both ways to borrow money using your property as security, but they function very differently. Understanding these differences is crucial before making a decision.

Repayment Terms

• Regular Mortgage: Requires regular monthly repayments of both capital and interest. The loan is gradually repaid over an agreed term, usually 25 or 30 years, though shorter terms are available.
• Equity Release: Doesn’t require regular monthly repayments. Instead, the loan and accumulated interest are typically repaid when the property is sold (usually upon death or moving into long-term care). Interest rolls up, increasing the amount owed over time.

Eligibility Criteria

Eligibility criteria for both differ significantly.

• Regular Mortgage: Lenders assess your income, credit history, and affordability to determine your eligibility. Stricter lending criteria may apply to those with poor credit.
• Equity Release: Lenders typically focus on your age (usually over 55), the value of your property, and its condition. Income and credit history might be less critical, but still considered.

How the Loan is Secured

Both use your property as security, but the implications differ.

• Regular Mortgage: If you default on repayments, the lender could repossess your property. Your credit rating will be affected. You may face legal action and additional charges.
• Equity Release: If you default on the terms of the plan (though it is less common as no monthly payments are required), the lender could still seek to repossess your property after certain events.

Your property may be at risk if repayments are not made.

The Amount You Can Borrow

• Regular Mortgage: The amount you can borrow depends on your income, credit score and the property’s value, usually up to a maximum loan-to-value (LTV) ratio.
• Equity Release: The amount you can borrow is determined by the property’s value and your age. You can typically borrow a percentage of your property’s value, which increases with age.

Overall Cost

The overall cost of each option can be difficult to compare directly due to the different repayment structures.

• Regular Mortgage: The total cost is clear from the outset, based on the interest rate and repayment schedule. Early repayment charges may apply if you settle early.
• Equity Release: The final cost is uncertain. Interest rolls up, meaning the debt grows over time. The total cost depends on how long you live in the property and interest rates.

Choosing the Right Option

The best choice depends on your individual circumstances, financial goals, and risk tolerance. Equity release can provide a lump sum for retirement or unforeseen expenses, but it carries risks. A regular mortgage offers more predictable repayments but requires a steady income and good credit history. Seeking independent financial advice is crucial before making a decision.

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People also asked

How much can I borrow with equity release?

The amount you can borrow with equity release depends on your age, the value of your property, and the lender’s criteria. It’s typically a percentage of your property’s value.

Is equity release suitable for everyone?

No, equity release isn’t suitable for everyone. It’s important to consider your financial situation, long-term plans, and risk tolerance before proceeding. Seeking independent financial advice is recommended.

What are the risks of equity release?

Key risks include reducing the inheritance you leave behind, owing more than your property is worth, and losing your home if you are unable to fulfil the terms of the plan.

What happens if I die before repaying an equity release loan?

Typically, the loan is repaid from the sale proceeds of your property after your death. This reduces the inheritance available to your beneficiaries.

Can I make overpayments on an equity release plan?

The possibility of making overpayments on an equity release plan varies depending on the specific plan and lender. Check the terms and conditions of your agreement.

What is the difference between lifetime mortgages and home reversion plans?

Both are types of equity release, but lifetime mortgages allow you to stay in your home while borrowing against its value, while home reversion plans involve selling part or all of your home to a company.