Understanding equity release, home reversion plans and lifetime mortgages
For many retirees, their home is the largest asset and whilst we all would love to pass this money on to our dependants, it is rarely sensible to live on a low income in retirement just to pass the money on in your will.
Equity release can provide homeowners typically over the age of 55 with the facility to release part of or all of the money from their home and remain in the property rent free until they die or enter long-term care. There are two main categories of equity release; lifetime mortgages and home reversion plans. Each type of equity release scheme facilitates a different method of releasing equity in your home; there are various other useful features available to create the ideal equity release scheme for you.
Lifetime mortgages are a mortgage secured against the value of the home. There is normally no monthly repayments and interest is rolled up over the life of the loan and repaid upon leaving for long-term care or death, at which point the property is sold and the lender repaid. With some plans, you can choose to make monthly repayments to cover the interest in part or in full maintaining the initial capital withdrawn. How much you can release from your property will depend on the value of your property and your age. Some providers may take into account past or present medical conditions.
Lifetime mortgages are the most popular form of equity release. A Lifetime mortgage works as follows:
- A lender offers a cash lump sum, or a monthly income, or a combination of the two which is based on the value of a property and the age of the homeowner
- Interest is charged on the loan but the homeowner does not normally pay it
- Instead, the interest is added or ‘rolled up’ on top of the original loan
- Interest is compounded over the years (interest charged on interest)
- On the eventual sale of the property, the loan and the interest is repaid
The loan can potentially increase to greater than the value of the property particularly if the property price should fall or you live longer than expected which is good for you but not the lender. To cover this, most schemes will offer a no-negative-equity guarantee under the equity release council SHIP standards. Look for this logo if you are considering one of these mortgages.
A Lifetime Mortgage can quickly erode the remaining equity and as a result, there may be no value left to pass on.
An alternative to the lifetime mortgage is a home reversion plan. This allows you to access all or part of the value of your property whilst retaining the right for you to live in the property. You no longer own your home (or the part of it that you have sold) but you have the right to live in the home for the rest of your life or until the occurrence of certain events. You may be required to pay rent, which is usually a token sum, but it may be more. It involves selling all or a percentage of a property to the provider for an agreed lump sum and/or income. The amount you receive for the property will normally be less than its market value. This reflects factors such as your age, the value of your property and how much property prices are expected to change in the future.
When the property is eventually sold, the reversion company receives the same percentage of the sales proceeds as you originally agreed. The remainder is yours or more commonly passed on in your will to your dependants.
Mortgage advice based on you circumstances
Equity release needs to fit with a customer’s needs, objectives, circumstances and preferences, where the benefits need to outweigh the drawbacks and be more suitable than alternative methods of raising funds.
It is important to seek independent legal advice before entering a legally binding equity release contract. We have years’ experience in this area and can offer unbiased advice, which is based on your circumstances. Please call us on 01675 446500 and ask for an appointment with one of our advisers.
A mortgage is a loan that is secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Equity release may require a lifetime mortgage or home reversion plan. To understand the features and risks, ask for a personalised illustration.