Within the equity release industry there are two types of schemes available: lifetime mortgage and home reversion plans. Lifetime mortgages are a form of mortgage/loan and therefore have an interest element charged to the principal amount. They require repayment upon death. This repayment includes a capital sum of money plus any interest compounding onto the loan throughout the term of the product.
Statistics publicised by the Guardian and survey companies state that more than 50% of homeowners are asset rich but cash poor creating a strained retirement. If you see your situation the same and worry about a new mortgage home reversion may be the answer.
Home reversion plans are not mortgages. They are a home reversion sale, in full or in part. The funds are tax free like lifetime mortgages, but you never have to repay them until death or moving into long term care.
An In-depth Look at Home Reversion Schemes
Under home reversion schemes you decide the amount of cash you need for your retirement or for the next several years. You give this value to a reversion provider or use a home reversion calculator to determine the loan to value percentage. While called the loan to value percentage it is basically the value of the home provided to you based on the lending parameters. You are never going to receive 100% of the true value for the home portion you sell.
Perhaps you sell 50% of your home. The provider may decide based on your age and property value that they can invest 30% of that 50% in a cash sum to you. If 50% of your home is worth £100,000 you would receive approximately £30,000.
At most you may receive 80% of your home value with current lenders providing you sell the entire home and that would be at an older age too.
Misunderstandings of the home reversion plan concept have created a couple of changes made by the Financial Conduct Authority. The main change is for no negative equity. The percentage of home offered in the equity release is based on keeping the equity in the home. This is the reason 100% of the home sold will not total 100% of the home value. There would be no return of investment for the company and more importantly it ensures the company cannot depend payment back should the house depreciate rather than appreciate.
Another area of importance is the lifetime tenancy agreement. This stipulates that the homeowner’s mentioned in the loan and agreement can live rent free in the home until death or until they move to a long term care facility.
Qualifying Parameters for Plans
Age and property value are the qualification parameters. The older a person is the more they can release in equity under home reversion schemes. The theory is that a return of investment will occur sooner; therefore, it is more comfortable to lend a little more for someone nearer the end of their life expectancy.
Home reversion schemes begin at age 65. For joint applicants the youngest homeowner has to be at least 65 and sometimes a combined 140 years is required.
The lowest property value accepted for home reversion is £60,000. You may find some providers have a higher minimum property value, but in general it starts at the aforementioned amount.
Since there is no interest, the homeowner is left to decide the amount of control they wish to keep on their home. It may be based on comfort level or inheritance.
Inheritance Protection is Based on You
Home reversion schemes do not worry you regarding interest and repayment; however, there can be a very real concern over inheritance. You are selling your home and using those funds now instead of leaving the home as inheritance. For many with two or more children the home would be sold eventually, but this is after your death where the funds are split as an inheritance.
When using home reversion you may not leave a whole lot of inheritance. It is directly related to the amount you sell. If you sell half the home already you have used half the inheritance you meant to leave. The good news is if the home appreciates then any equity left in the unsold portion is given to your heirs. Additionally, you can provide inheritance while you are alive by giving some of the equity to your family now.