Life stages > 60plus > Equity release > Main types of equity release

Main types of equity release

Equity release is a general term that covers different ways of getting cash or benefits from a property you own. The most common options available include:

Providers may have different trade names for their equity release products. In this section, we'll use the name that best describes what actually happens.

Reverse mortgage

With this option, you borrow an amount against your property and have the choice of receiving your funds either as:

  • A lump sum on the settlement of your contract.
  • A series of periodic instalments under the loan contract.
  • A pre-arranged facility under which you may draw down funds as you need them. This option is sometimes called a line of credit or cash reserve facility.

You may be able to combine some or all of the above options to better suit your needs.

Interest payments on a reverse mortgage accumulate until either you die or the property is sold. The amount you borrow is usually quite small in relation to the property’s value – this protects the lender in case they have to wait a long time before the loan (and the accumulated interest) is repaid. You need to borrow only what you need, and you pay interest only on what you borrow. The interest rate is higher for a reverse mortgage than it is for a normal home loan.

Factors to consider

There are reasons for and against a reverse mortgage for equity release:

For:

  • You borrow only what you need, when you need it - that means you have more control over your financial commitment.
  • The equity remaining at the time of repayment is still available for your heirs.
  • The interest cost may be lower than alternative equity release products.
  • The provider's fees may also be lower.

Against:

  • The amount available is likely to be relatively small compared to the value of your property.
  • Despite the relatively small amount that may be borrowed, it could still compound to a significant sum if you live a long time.

Term loans

A term loan is similar to a reverse mortgage except the loan has to be repaid at the end of an agreed term or when the loan grows to a fixed maximum percentage of the home value. On maturity the house normally has to be sold and the loan repaid.

Factors to consider

The things that you need to think about are similar to the reverse mortgage as they are similar transactions. However, there are a couple of extra issues:

For:

  • These loans are suitable if you know that you do not want to stay in your home for life and are happy to sell when the loan matures.
  • You know that you will have sufficient funds to repay the loan at maturity from some other source, for example, from a maturing investment or life insurance policy. 

Against:

  • You are committed to the eventual outcome as the loan may need to be repaid before you are ready to move.

Rates postponement

Some local councils let you defer rates payments until the property is sold. This is like borrowing an equivalent amount to your rates each year. Interest accrues on the outstanding amount and there may be establishment costs and ongoing management costs to pay. It’s also unlikely that you’ll be able to transfer the scheme to another property if you move outside the local council area.

The following councils are known to provide a rates deferral scheme:

Factors to consider

There are reasons for and against using rates deferral for equity release:

For:

  • You don't have to worry about finding the cash for rates increases (though they will be added to the loan).
  • Setup fees are generally low.
  • The annual interest payable is generally reasonable.

Against:

  • Not transferable outside council district.
  • You will probably not be able to combine this with any other equity release scheme.

Reverse annuity mortgage

In this case, you raise a loan on your property and use it to buy an annuity, which gives you a regular monthly allowance. Interest payments on the loan accumulate as in the reverse mortgage schemes. On death, the loan including any interest is repaid from the sale of the property.

Factors to consider

There are reasons for and against using a reverse annuity mortgage for equity release:

For:

  • You're normally assured a regular income for life, helping overcome the uncertainty of not knowing how long you will live.
  • You can also secure the loan until the second of a couple dies.
  • Essentially, you're using the equity in your home to meet living expenses.

Against:

  • It's not tax efficient - the interest payable under the mortgage isn't offset against the interest component of the annuity.
  • A relatively costly option.
  • The annuity may not be indexed to increase with inflation.
  • You're making a major financial commitment.
  • If you receive an "income-tested" benefit from the government (such as a younger spouse's New Zealand Superannuation, residential care or a widow's pension, the annuity will be treated as "income" even though it's not taxable). For further information see the Impact on government benefits.
Glossary: Equity
Glossary: lump sum
A large one-time payment of money.
Glossary: Interest
Glossary: investment
A way to use your money to make it grow.
Glossary: inflation
Inflation - is the rate at which the prices of goods and services increase over time. The effect of this is to reduce the purchasing power of money. For example, if you could buy something with $1000 now, in one years time, you would need $1020 to buy that same thing (assuming 2% inflation).
Glossary: pension
An income paid at regular intervals to a retired person, by a government or through an employer superannuation scheme.
Tags: