Types of equity release: how each plan works
Written and reviewed by the Later Life editorial teamUpdated 5 min read
There are two main types of equity release: lifetime mortgages, where you borrow against your home and keep ownership, and home reversion plans, where you sell part or all of it. Lifetime mortgages then come in several forms, including lump sum, drawdown, interest-paying, payment-term and enhanced plans. This page sets out how each type differs.
If you are new to the subject, our equity release guide explains how it works overall, including who can apply and what it costs. This page focuses only on the differences between the types. It is general information, not financial advice.
The two main types of equity release
A lifetime mortgage is a loan secured on your home. You keep full ownership, and the loan is repaid from the sale of your home when the last borrower dies or moves permanently into long-term care. A home reversion plan is a sale: a provider buys a share of your home and you keep the right to live there.
Lifetime mortgages make up more than 99% of new equity release plans, so most of the choices people face are between different kinds of lifetime mortgage.
Types of lifetime mortgage
The labels below describe features. A single plan can combine several of them, for example drawdown with optional interest payments.
Lump sum lifetime mortgage
You receive all the money at the start. Some people use this for a single, known cost, such as clearing an existing mortgage. The trade-off is that interest is charged on the whole amount from day one, even on money you have not yet spent.
Drawdown lifetime mortgage
You take an initial amount and agree a reserve you can draw on later. Interest is generally charged only on money you have actually taken, so the debt can grow more slowly. The plan terms set out how and when the reserve can be used.
Interest-paying lifetime mortgage
You choose to pay some or all of the monthly interest. Paying all of it keeps the balance from growing; paying part of it slows the growth. If you stop, interest is usually added to the loan instead, as with a standard plan. This gives more control over the eventual debt, but the payments come from your income.
Payment-term (mandatory payment) lifetime mortgage
Here, payments are a condition of the plan for a set period. Some lenders offer these from age 50, whereas standard lifetime mortgages start at 55. Because the payments are required, missing them breaches the terms and could put your home at risk.
Enhanced lifetime mortgage
An enhanced plan takes your health and lifestyle into account. MoneyHelper explains that some providers may offer larger sums to people with certain medical conditions, or lifestyle factors such as smoking. A larger amount can help if you need it, but it also means more interest and less left in your estate.
Inheritance protection: a feature, not a type
Some lifetime mortgages let you ring-fence a percentage of your home's value for your beneficiaries. You release less in return. This can be added to several of the types above.
Home reversion in brief
With a home reversion plan, you sell all or part of your home, usually for well below its market value, and live there rent-free under the plan's terms. There is no interest, but you give up the share you sell and any future rise in its value. These plans usually have a higher minimum age, commonly 60.
Our guides to home reversion plans and lifetime mortgage vs home reversion cover this in detail.
Comparing the types of equity release
| Type | How you receive money | Payments while you live there | Main trade-off |
|---|---|---|---|
| Lump sum | All at the start | None required | Interest on the full amount from day one |
| Drawdown | Initial amount plus a reserve | None required | Reserve use depends on the plan terms |
| Interest-paying | Lump sum or drawdown | Optional | Payments come from your income |
| Payment-term | Lump sum or drawdown | Required for a set period | Missed payments could put your home at risk |
| Enhanced | Lump sum or drawdown | Usually none required | Larger loan, more interest |
| Home reversion | Lump sum or regular payments | None (no loan) | You sell a share for below market value |
Plans from Equity Release Council members share core protections whatever the type. These include a no negative equity guarantee on lifetime mortgages and the right to stay in your home, subject to the plan's terms. Since 28 March 2022, new lifetime mortgages from members have also had to allow penalty-free voluntary partial repayments.
Every type has upfront fees and possible early repayment charges. Our guide to equity release costs explains them.
Other options to compare
Equity release is one of several ways to raise money in later life, and each has trade-offs. Using savings before borrowing may keep your home's value intact, though it reduces your financial buffer. Downsizing can release money without a loan, but brings moving costs and upheaval. A retirement interest-only (RIO) mortgage requires monthly interest payments, so the debt does not grow, but the payments must stay affordable.
Getting help choosing between types
Only an FCA-regulated adviser who looks at your full circumstances can say which type, if any, may suit you. They can show illustrations for more than one type side by side. Our guide to finding a regulated equity release adviser explains what to check. We do not provide financial advice.
Frequently asked questions
How many types of equity release are there in the UK?
There are two main types: lifetime mortgages, where you borrow against your home and keep ownership, and home reversion plans, where you sell all or part of your home. Lifetime mortgages then come in several forms, such as lump sum, drawdown, interest-paying, payment-term and enhanced plans. Many plans combine more than one feature, so an adviser will usually describe a plan by its features rather than a single label.
Is a drawdown plan a different type of equity release from a lump sum plan?
Both are lifetime mortgages. The difference is how the money is paid out. A lump sum plan pays everything at the start, so interest is charged on the full amount from day one. A drawdown plan pays an initial amount and keeps a reserve you can draw on later, with interest generally charged only on the money you actually take.
What makes a lifetime mortgage 'enhanced'?
An enhanced lifetime mortgage takes your health and lifestyle into account. MoneyHelper explains that some providers may offer larger sums to people with certain medical conditions, or lifestyle factors such as smoking. You would normally complete a health and lifestyle questionnaire. A larger amount also means more interest over time, which reduces what is left for your estate.
Can I change to a different type of equity release later?
Changing usually means repaying your current plan and taking out a new one, which can involve early repayment charges and new fees. Some plans let you add features within the same plan, such as making voluntary payments or drawing from a reserve. Checking what your plan allows, and what switching would cost, is something an FCA-regulated adviser can do before you decide.
Which types of equity release involve making monthly payments?
Standard lifetime mortgages do not require monthly payments. Interest-paying plans let you pay some or all of the interest if you choose. Payment-term, or mandatory payment, lifetime mortgages require payments for a set period, and missing them could put your home at risk. Home reversion plans involve no borrowing, so there is no interest to pay.
