Lifetime Mortgages vs Home Reversion Plans

Lifetime Mortgages vs Home Reversion Plans: Understanding Your Equity Release Options

If you’re a homeowner aged 55 or over, you may be considering equity release as a way to unlock the value of your property and access tax-free cash.

The two main equity release options are lifetime mortgages and home reversion plans. In this article, we’ll explain the key differences between these two products, as well as their pros and cons, to help you make an informed decision.

What is a Lifetime Mortgage?

A lifetime mortgage is a type of equity release plan that allows you to borrow a lump sum or receive regular payments against the value of your property. The amount you can borrow is based on several factors such as your age, health, and the value of your property.

Typically, you can borrow between 20% and 60% of your property’s value. The loan is secured against your home, which means that the lender has a claim on your property.

However, you can continue to live in your home for as long as you like, as long as you meet the terms of the loan agreement.

According to the Equity Release Council, the average amount released through a lifetime mortgage in Q4 2022 was £89,890. The average interest rate for a new lifetime mortgage plan was 3.55%, slightly lower than the previous year. Home improvements remained the most popular reason for equity release, accounting for 26% of all plans in 2022.

How They Work

With a lifetime mortgage, you don’t have to make any repayments on the loan while you’re living in your home. Instead, interest is added to the balance over time, which means that the amount you owe can increase quickly if you don’t make any payments.

However, many lifetime mortgage providers now offer the option to make interest payments, which can help to reduce the impact of compound interest on the debt.

You can choose to receive the funds from a lifetime mortgage as a lump sum, regular payments, or a combination of both. For example, you may choose to receive a lump sum upfront to pay off debts or make home improvements, and then receive regular payments to cover ongoing living expenses.

It’s important to carefully consider your options and seek independent financial advice before choosing a lifetime mortgage or any other type of equity release plan. A financial adviser can help you understand the risks and benefits associated with each option and help you choose a plan that’s right for your individual circumstances.

For example, let’s say you’re 65 years old and own a property valued at £500,000. You may be eligible for a lifetime mortgage that allows you to borrow up to 30% of the value of your property, or £150,000. You could choose to receive the funds as a lump sum upfront or as regular payments over time, depending on your needs.

It’s important to remember that the amount you can borrow and the interest rates associated with lifetime mortgages can vary depending on the provider and your individual circumstances. It’s important to carefully consider your options and seek independent financial advice before making any major financial decisions.

Features:

• A lifetime mortgage is a type of equity release plan that allows you to borrow money against the value of your property.
• The loan is secured against your home, which means that the lender has a claim on your property.
• You don’t have to make any repayments on the loan while you’re living in your home.
• Interest is added to the balance over time, which means that the amount you owe can increase quickly if you don’t make any payments.
• You can choose to receive the funds from a lifetime mortgage as a lump sum, regular payments, or a combination of both.
• The amount you can borrow and the interest rates associated with lifetime mortgages can vary depending on the provider and your individual circumstances.

Benefits:

• One of the key benefits of a lifetime mortgage is that it allows you to access tax-free cash without having to sell your home or downsize.
• Lifetime mortgages offer flexibility in terms of how you receive the funds and how you repay the loan.
• Some lifetime mortgages offer a no-negative-equity guarantee, which means that you’ll never owe more than the value of your home.
• You can continue to live in your home for as long as you like, and you don’t have to make any repayments on the loan until you die or sell your home.
• Lifetime mortgages can be a good option if you need to access cash for home improvements, to pay off debts, or to supplement your retirement income.
• Lifetime mortgages can also be a good option if you want to leave an inheritance for your loved ones, as any remaining equity in your home will be passed on to your estate after you die.

It’s important to carefully consider your options and seek independent financial advice before choosing a lifetime mortgage or any other type of equity release plan. A financial adviser can help you understand the risks and benefits associated with each option and help you choose a plan that’s right for your individual circumstances.

What is a Home Reversion Plan?

A home reversion plan is another type of equity release that allows you to sell a portion or all of your home to a provider in exchange for a tax-free lump sum or regular payments.

Unlike a lifetime mortgage, you no longer own the property, but you do have the right to remain in the home rent-free for the rest of your life.

According to the Equity Release Council’s Q4 2021 Market Report, home reversion plans accounted for just 0.8% of the overall equity release market in terms of new plans agreed. This means that while home reversion plans can be a viable option for some homeowners looking to release equity, they are much less popular than lifetime mortgages.

How They Work

With a home reversion plan, you sell a portion of your home to an equity release provider in exchange for a lump sum or regular payments. The provider becomes the co-owner of the property and you retain the right to live in the property for the rest of your life or until you move into long-term care. Here’s how it works:

1. Valuation The first step in the home reversion process is to get a valuation of your property. The provider will typically value the property at a lower rate than the market value to account for the fact that they won’t have full ownership of the property.
2. Sale of Equity Once the property is valued, you can choose to sell between 20% and 100% of your home to the provider, depending on your age and health. The provider will pay you a lump sum or regular payments based on the portion of the property you’ve sold. For example, if you sell 50% of your home to the provider, they will pay you 50% of the property’s value.
3. Co-ownership After the sale of equity, the provider becomes the co-owner of the property. You’ll still be responsible for maintaining the property, but you won’t need to pay rent. It’s important to note that you won’t be able to sell the property or make any major changes without the provider’s approval.
4. Repayment You won’t need to make any repayments on the home reversion plan while you’re living in the property. However, when the property is eventually sold, the provider will receive their share of the proceeds from the sale. For example, if you sold 50% of your home to the provider, they would receive 50% of the sale price.

Here’s an example of how a home reversion plan could work: Let’s say you’re 70 years old and own a property valued at £500,000. You choose to sell 50% of your home to a home reversion provider, which would give you a lump sum of £250,000. The provider would become the co-owner of the property and you would still have the right to live in the property for the rest of your life. When the property is eventually sold, the provider would receive 50% of the sale price.

It’s important to carefully consider your options and seek independent financial advice before choosing a home reversion plan or any other type of equity release plan. A financial adviser can help you understand the risks and benefits associated with each option and help you choose a plan that’s right for your individual circumstances.

Features and Benefits

• One of the key benefits of a home reversion plan is that it offers a guaranteed equity release, as you know exactly how much you’ll receive for the portion of the property you’ve sold.
• Unlike with a lifetime mortgage, you won’t need to worry about interest charges with a home reversion plan, as the provider doesn’t charge interest on the money you receive.
• You can choose to receive the money from a home reversion plan as a lump sum or regular payments, depending on your needs.
• You’ll still have the right to live in the property for the rest of your life or until you move into long-term care.
• Some home reversion plans offer the option to release additional equity in the future, which can be useful if you need to access more cash later on.
• You won’t need to make any repayments on the home reversion plan while you’re living in the property.
• The amount you can sell and the amount you receive will depend on your age, health, and the value of your property.
• Home reversion plans can be a good option if you want to release equity from your home without taking on any debt or making any repayments.
• However, it’s important to carefully consider your options and seek independent financial advice before choosing a home reversion plan or any other type of equity release plan. A financial adviser can help you understand the risks and benefits associated with each option and help you choose a plan that’s right for your individual circumstances.

Differences Between Lifetime Mortgages and Home Reversion Plans

Conceptual Differences:

The main conceptual difference between lifetime mortgages and home reversion plans is that with a lifetime mortgage, you retain ownership of your property, while with a home reversion plan, you sell a portion or all of your home to the provider.

With a lifetime mortgage, you’re borrowing money against the value of your property and the loan is secured against your home, but you retain ownership of the property. You can choose to receive the funds as a lump sum, regular payments, or a combination of both.

With a home reversion plan, you’re selling a portion or all of your home to an equity release provider in exchange for a lump sum or regular payments. The provider becomes the co-owner of the property and you retain the right to live in the property for the rest of your life or until you move into long-term care.

Technical Differences:

Technically, lifetime mortgages are loans secured against your property, while home reversion plans involve the sale of the property.

With a lifetime mortgage, you’ll typically pay interest on the amount you’ve borrowed, which can be added to the balance over time. When the property is eventually sold, the lender will receive the amount borrowed plus any interest that has accrued.

With a home reversion plan, you won’t pay interest on the money you receive, as you’ve sold a portion or all of the property to the provider. Instead, the provider will receive their share of the sale price when the property is eventually sold.

Financial and Legal Implications

Financial Implications:

With a lifetime mortgage, you’ll usually pay interest on the amount you borrow, which can add up over time and reduce the amount of equity left in your property. The interest is typically added to the balance over time, which means that the amount you owe can increase quickly if you don’t make any payments.

When the property is eventually sold, the lender will receive the amount borrowed plus any interest that has accrued. This means that there may be less equity left in the property to pass on to your loved ones.

With a home reversion plan, you won’t need to worry about interest charges, but you’ll receive less money upfront than you would with a lifetime mortgage. This means that you may not be able to access as much cash as you need.

When the property is eventually sold, the provider will receive their share of the sale price. This means that there may be less equity left in the property to pass on to your loved ones.

Legal Implications:

Both lifetime mortgages and home reversion plans are regulated by the Financial Conduct Authority (FCA) and providers must comply with strict rules and regulations.

It’s important to carefully read and understand the terms and conditions of any equity release plan before signing up. You should also seek independent legal advice to ensure that you understand the legal implications of the plan.

With a lifetime mortgage, you’ll need to ensure that you have a valid will in place, as the loan will need to be repaid from the proceeds of your estate when you pass away. This means that there may be less money left to pass on to your loved ones.

With a home reversion plan, you’ll also need to ensure that you have a valid will in place, as the provider will receive a share of the sale price when the property is sold.

Which One is Right for You?

When deciding between a lifetime mortgage and a home reversion plan, it’s important to consider your individual circumstances and financial goals.

A lifetime mortgage may be more suitable if you’re looking for flexibility in how you receive the funds and how you repay the loan. A home reversion plan may be more suitable if you’re looking for a guaranteed equity release and want to avoid interest charges.

Some of the factors to consider when deciding between a lifetime mortgage and a home reversion plan include your age, the value of your home, your health, and how much equity you want to release.

Conclusion

Before making any decisions, it’s crucial to seek legal and financial advice. A specialist equity release adviser can provide expert advice on the suitability of equity release, help you understand the different options, and recommend the best product for you.

They can also explain the costs involved, the impact on your estate, and any potential effects on your entitlement to state benefits.

Additionally, it’s essential to seek legal advice to ensure that you understand the legal implications of the equity release product you choose. A solicitor can advise you on the legal documentation and ensure that you fully understand the terms and conditions of the product.

If you would like to find out how much money you might be able to get you can use our free equity release calculator. No personal details are required to use it so you don’t have to worry about anybody calling you.