There are two primary types of equity release schemes available, both of which offer their own unique set of advantages. Home reversions were once incredibly popular but have quickly been surpassed by the options and flexibility offered by lifetime mortgage schemes. Both types of equity release products can prove beneficial to homeowners, but they differ in rather substantive ways.
Both types of equity release schemes, home reversion and lifetime mortgages, require that the homeowner be at least 55 years old and the property usually has to meet a minimum valuation.
Lifetime mortgages are incredibly popular in the equity release marketplace. A lifetime mortgage functions as a loan where the homeowner borrows money against the security of their property. In exchange, the homeowner receives a lump sum payment or several smaller lump sum payments. The frequency and size of the payments depends on the plan chosen.
A lifetime mortgage allows the homeowner to stay living in the home rent-free just as a home reversion plan does. However, with this scheme you retain full ownership of the property. There are several different types of lifetime mortgage schemes available but with most, the homeowner is not expected to make any repayments. The loan is simply repaid when the home is eventually sold. That loan will include the principal amount borrowed in addition to the interest that has since accrued. With many plans, the interest rolls-up and is added to the balance.
There are various types of lifetime mortgage products available. For those homeowners who are concerned about interest roll-up there are plans that allow for repayments to be made such as interest-only plans or voluntary repayment plans. Making repayments against a lifetime mortgage can be very beneficial for homeowners who are concerned about the impact of interest roll-up. By limiting the amount of interest accruing, the debt that is eventually repaid can be much less. This often means that a larger inheritance is available for loved ones.
For those homeowners who just want to receive a one-time cash payment, a lump sum plan is often best. Yet still there is the enhanced lifetime mortgage which is available for those homeowners who have a shorter life expectancy given qualifying medical conditions or lifestyle choices. There is also a drawdown lifetime mortgage plan which allows you to take multiple smaller payments instead of one larger one. This is another option for the homeowner who is concerned with interest roll-up. Interest only ever accrues on money that has already been paid out. By taking smaller payments, the interest amount accrued can be smaller.
Home reversion plans are no longer nearly as popular as they once were. However, they do still offer all the same benefits they did when they were so widely used. Namely, they allow the homeowner to safeguard an inheritance for loved ones and they do not function as a loan.
Instead, a home reversion functions just like a regular sale of a home. The homeowner sells off part, or all, of the property in exchange for a tax-free cash payment. When the home is finally sold, the proceeds are divided according to the percentages of the home’s ownership. So, for example, if 40% of the home was sold in a home reversion plan, the lender would receive 40% of the sale’s proceeds while the homeowner receives the other 60%. That 60% would revert back to the homeowner’s estate and distributed as an inheritance if that was the homeowner’s wishes.
With a home reversion plan, the homeowner can stay living in the home without paying any rent. One consideration to bear in mind if thinking about this type of equity release scheme is that the property sale that takes place as part of a home reversion will likely provide a lesser amount than would be the case if the home was sold in a more traditional way. This is because the homeowner is still able to stay living in the home rent-free.
There are multiple options available when it comes to equity release schemes. We always advise homeowners to reach out to a trusted professional to get knowledgeable advice when choosing the best plan. We are available for consultation in-person, over the phone, through email or even via live chat.