What equity release alternatives exist other than Home Reversion Plans?
There are a number of products alternative to home reversion plans that are currently available in the equity release marketplace. Two of these are lifetime mortgages and retirement mortgages. While there are similarities between the two products, there are also vast differences.
Lifetime mortgages are loans secured against the homeowner’s property that are repaid following the eventual sale of the property. This typically takes place when the last remaining homeowner either moves into long term care or passes away. There are several variations of lifetime mortgages, all with different features. Lump sum lifetime mortgages give the homeowner a lump sum payment and the loan is simply repaid when the home is sold. Drawdown lifetime mortgages allow for a lump sum cash payment with remaining cash stored in a cash reserve facility that can be drawn from by the homeowner, if needed. A voluntary repayment lifetime mortgage allows the homeowner to make payments against their lifetime mortgage if they choose to do so.
Retirement mortgages are loans secured against a property either shortly before the homeowner enters retirement or during retirement. The lending criteria for a retirement mortgage has become more stringent in the last few years, especially for homeowners over the age of 65. The homeowner can choose the duration of their retirement mortgage and it can be either for the remaining lifetime of the homeowner or for a fixed number of years. The homeowner does have to make payments against the retirement mortgage. The frequency, duration and amount of of those payments are outlined in the mortgage deed.
Retirement mortgages require that the homeowner make payments against the loan while lifetime mortgages do not. Lifetime mortgages last for the remaining lifetime of the homeowner, while the duration of a retirement mortgage can be determined by the homeowner at outset. These are some of the primary differences between the two products, though they are similar in that they are both loans secured against the property, though repayment is different between the two.
How does a Home Reversion Plan compare to a Lifetime Mortgage?
There are a few primary differences between the two main types of equity release schemes, the lifetime mortgage and the home reversion plan.
A lifetime mortgage is essentially a loan secured against your home that allows you to release equity from your property. The homeowner is able to retain full ownership of the home with a lifetime mortgage and the homeowner benefits from any increases in the value of the property, since 100% of the home is still owned by the homeowner. There are various types of lifetime mortgage products currently available on the marketplace, all with difference features and obligations, making them fairly easy to tailor to individual needs. For example, there are lump-sum lifetime mortgages, drawdown lifetime mortgages and interest-only lifetime mortgages. The homeowner can choose a product that best suits their needs and many allow for repayment in some capacity.
A home reversion plan functions quite differently from a standard lifetime mortgage and it has lost some of its popularity in recent years. A home reversion requires that the homeowner sell off part or all of their home to the lender. This is a primary difference between the home reversion and the lifetime mortgage, as with the latter the homeowner is able to retain all ownership. With the home reversion, the homeowner is able remain in their home for their remaining lifetime without having to pay any rent, but they are still responsible for all upkeep and maintenance of the home. The homeowner does not own all 100% of the home any longer so the homeowner only sees the benefit of value increases on the percentage of the home still owned. A home reversion plan does allow for the protection of an inheritance. When the property is finally sold, the profits are split based on the percentages owned. So, if the homeowner owned 70% of the home, the estate would receive 70% of the profits from the sale of the home.
What advantages/disadvantages do Home Reversions have over Lifetime Mortgages?
Lifetime mortgages account for over 99% of all equity release schemes, with home reversions having lost much of their popularity in the last few years. However, there are advantages and disadvantages to both schemes.
Lifetime mortgages come in various versions and can be tailored to meet the needs of individual homeowners where home reversion plans are fairly standard and straight forward. With a lifetime mortgage, there is the possibility for the homeowner to make repayments if they so choose, the frequency and amount of which would be dependent upon the product and lender chosen.
Lifetime mortgages do not require the homeowner to lose ownership of any portion of their home. The mortgage is simply secured by the property and the debt is repaid when the home is eventually sold. With a home reversion plan, the homeowner must sell off a portion of, or all, of the home and therefore lose ownership of that percentage of the home. In exchange for the percentage sold, the homeowner receives a monthly income or a lump-sum cash payment with which they can do whatever they want. With a home reversion plan, there is no interest to pay since it does not function as a loan so the homeowner does not continue accruing debt.
Both products allow the homeowner to stay in the home permanently for the remainder of their lifetime. The home will eventually be sold at the time the last remaining homeowner either moves into permanent long term care or passes away. With a home reversion, the proceeds from the sale of the property are inherited by beneficiaries. So, if the homeowner sold 30% of the home but retained 70%, the estate would receive 70% of the profits from the sale of the home. With a lifetime mortgage, there is a chance for an inheritance but when the home is sold, the lifetime mortgage must first be paid off. If there is a profit remaining, it is returned to the estate for beneficiaries. If there is no profit remaining, there is nothing left to be inherited. It is often easier to ensure an inheritance with a home reversion plan than it is with a lifetime mortgage.
What types of Lifetime Mortgage Plans are available?
Lifetime mortgages can be very flexible and can offer a number of unique features, allowing them to be fairly easy to tailor to each homeowner’s individual needs. A lifetime mortgage is a loan secured against a property. The homeowner retains 100% ownership of the property and can stay living in the home for the remainder of their lifetime. The debt is eventually paid off when the home is sold, which typically takes place after the youngest homeowner has either moved into permanent long term care or has passed away. If there is any profit remaining after the property sale, it is returned to the homeowner’s estate to be passed on to beneficiaries.
There are several different types of lifetime mortgages, all with different unique features. Homeowners can choose from voluntary repayment mortgages, drawdown mortgages, and lump sum mortgage schemes. With voluntary repayment mortgages, the homeowner can make repayments against the loan either on a regular basis or when able in order to help control the overall loan balance. A drawdown lifetime mortgage pays out the initial lump sum payment to the homeowner but also allows for any remaining unused cash to be set aside in a cash reserve facility for later use, if the homeowner should choose to use it. A lump sum lifetime mortgage is quite simple, with the homeowner receiving a lump sum payment and that payment being paid back when the home is sold.
Depending on the product chosen and the lender, there are a variety of features that can be added to many of these products to make them more individualized for each homeowner’s needs. Because of their available features, lifetime mortgage products account for over 99% of all equity release schemes used.
Which is the most flexible Equity Release Scheme – Home Reversion or Lifetime Mortgage?
Deciding between a lifetime mortgage and a home reversion is a very personal decision and choosing the right product will depend on each individual homeowner’s needs.
There are many options available with a lifetime mortgage product and it is easy to either find one that has everything a homeowner is looking for or to customize it in a way that it provides exactly what is needed. There are different kinds of mortgages such as the drawdown lifetime mortgage, lump sum lifetime mortgage, or voluntary repayment lifetime mortgage. With the drawdown mortgage, the homeowner receives their lump sum cash up front and the rest of the cash available to them is held separately in a cash reserve facility that the homeowner can tap into at a later date, if needed. The lump sum lifetime mortgage is very straightforward and simple and the homeowner receives their lump sum payment and the loan is repaid when the home is eventually sold. The voluntary repayment lifetime mortgage allows the homeowner to make payments against their loan to help control the overall loan balance.
Homeowners may also be able to take advantage of protection such as the inheritance protection and downsizing protection. The inheritance protection allows homeowners to set aside a percentage of their home at the loan’s outset, allowing it to be reserved for inheritance. Downsizing protection allows the homeowner to sell their current property and repay their lifetime mortgage if the sale of the property takes place at least 5 years after the loan began.
These features are not readily available with a home reversion plan but the home reversion has its own set of benefits as well. The homeowner does not pay any interest with a home reversion, since there is no loan taken out. Secondly, an inheritance can be guaranteed. If the homeowner only sells off 30% of their home through home reversion, when the property is sold, the homeowner’s estate will still receive 70% of the profits from the sale.
Lifetime mortgages account for more than 99% of all equity release schemes and do offer a number of customizable features. That said, a home reversion plan also has its advantages, particularly when it comes to safeguarding a sizable inheritance. Ultimately, choosing the best product depends on each individual homeowner’s needs.
Which offers the highest release – Home Reversions or Lifetime Mortgages?
Depending on the age of the homeowner, a full home reversion plan can sometimes release more money than a lifetime mortgage and if the homeowner only sells a portion of the home, the remaining share can continue growing in value. There are several factors to consider when trying to determine which will give the biggest release.
A home reversion plan will likely give the homeowner a lower lump sum than the percentage being purchased is worth at the time of purchase. However, there is no secure way to predict what the property market is likely to do in the future. The property value may go down further in the future which would mean the amount received was a good price. The lender, of course, wants to see the value of the share of the home they purchased continue to rise until the sale of the home takes place. And the older the homeowner is when the home reversion is started, the higher the percentage the homeowner will receive of the home’s market value.
A lifetime mortgage is an actual loan which means that interest accrues, which is not the case with a home reversion plan. This means that when the home is sold, the full principal balance along with all accrued interest is due back to the lender. The homeowner retains 100% ownership of the property for the duration, but may not see any money left to beneficiaries after the final sale of the property. How much can be released with a lifetime mortgage depends on several factors including homeowner age and health and property valuation.
How much can I release with a Lifetime Mortgage?
The amount you can release with a lifetime mortgage depends on several factors including your age, your health and lifestyle, and the valuation of your property. It is true that the older you are when you release equity does have a direct impact on how much you are able to release. If you are older, you are likely to receive a higher release. This is simply because your life expectancy is less than it would be for someone who is younger. You also may be able to release more via an enhanced product if you are particularly unhealthy or live an unhealthy lifestyle. Those with a chronic illness, or take certain medications, are often able to take advantage of an enhanced lifetime mortgage that allows for a larger equity release, again related back to a shorter life expectancy. Because there are several factors that determine maximum equity release, the number is different for each homeowner.