Equity Release, Home Reversion Plans & Lifetime Mortgages
For many retirees, the main 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 home-owners 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 types of equity release; lifetime mortgages and home reversion plans.
Lifetime mortgages are a mortgage secured against the value of the home. There are 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you can choose to make monthly repayments to cover the interest in part or in full maintaining the initial capital withdrawn.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.
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, rent free. It involves selling all or a percentage of a property to the provider for an agreed tax-free amount. The amount you receive again depends on the value of the property and your age. 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 past on in your will to your dependants.
PLEASE NOTE: Your home may be repossessed if you do not keep up repayments on your mortgage.
Also see -
Currently the FCA does not regulate home reversion schemes