Having decided that equity release is right for you, you need to choose between a lifetime mortgage and a home reversion plan. Both allow you to tap into your home’s equity and benefit from extra funds during your retirement. You can continue living in your home without worrying about monthly repayments but there are distinct differences between the two options. We’ll detail the differences between them here so that you have a better understanding of what each type entails.
A lifetime mortgage
This type of mortgage involves taking a loan out against your home without having to make monthly repayments, although you can choose a plan where you pay the interest. You retain ownership of your home and can choose to receive one lump sum or smaller sums. The interest on the loan is compounded, which means you pay interest on the interest. Your estate repays the loan and the compounded interest to the lender when you move into long-term care or die. If you are living as a couple, nothing is repaid until the last one of you either moves into a residential care home or passes away. This provides security and peace of mind knowing that you can live there for the rest of your lives.
There are various lifetime mortgages to consider. Here are the main ones:
- Roll-up lifetime mortgage: You receive a lump sum and don’t make any monthly repayments. The interest is rolled up (compounded) and added to the total loan. The loan and compounded interest are repaid when you go into long-term care or die. The interest rate for this type of plan is usually fixed, which protects you against future rate increases.
- Drawdown lifetime mortgage: You receive a smaller sum initially then further amounts over time, either regularly or when you need the cash. This gives you more flexibility with your finances. The interest is compounded but it’s only charged on the amount you’ve withdrawn, not the total amount available to withdraw. This means your debt increases more slowly than it does with a roll-up lifetime mortgage. Each withdrawal may incur a different rate but the interest rate on your initial loan will stay the same.
- Interest serviced lifetime mortgage: You receive a lump sum and this loan isn’t repaid until you either go into a permanent care home or die. However, this type of lifetime mortgage differs from the others in that you make monthly interest payments. The interest rate is fixed and you can pay all or some of the interest each month, reducing the final amount owed. If you choose to stop making these interest payments, your mortgage will change to a roll-up lifetime mortgage. This is good protection if you borrow as a couple and one of you dies as the surviving person may find it difficult to afford the interest payments.
With a lifetime mortgage, you receive a tax-free lump sum that you can spend as you please to make your retirement more comfortable. You retain ownership of your home and don’t need to worry about monthly repayments. You can ring-fence some of your property’s value to ensure you still have something to pass on to your beneficiaries.
Equity release reduces your estate’s value and the amount to be passed on to your beneficiaries. As the interest is compounded with a roll-up lifetime mortgage and a drawdown lifetime mortgage, the debt builds up very quickly. Ensure you have a ‘no negative equity guarantee’ so that your estate isn’t liable to repay more than the proceeds of the sale. As well as the interest, there are arrangement fees to pay, such as application fees, valuation fees and legal costs. Choosing equity release may work out more expensive than other options in the long run. It may be better to downsize and move to a smaller home in Bexleyheath, for example. You may also be subject to early repayment charges if you decide to repay your lifetime mortgage early.
A home reversion plan
A home reversion plan is different from a lifetime mortgage in that you don’t have a loan secured against your home. Instead, you sell part or all of your home to a provider in return for a tax-free lump sum (or a smaller sum with further amounts in the future). This amount tends to be higher than the amount you could borrow with a lifetime mortgage. As you haven’t taken out a loan, there’s no interest to pay.
You are also given a lifetime lease so, although someone else owns part or all of your home, you can still live there for the rest of your life. You either live there completely rent-free or pay a nominal amount of rent each month. Check the terms of the lease beforehand so that you know what your commitment will be.
As with a lifetime mortgage, the property isn’t sold until you either go into long-term care or die. When the property has been sold, the provider receives its share of the sale proceeds, which includes any increase in the value of the property. You or your estate receive the remainder, depending on your share of the property. For example, if you sold 30% of your property in Bexley to the provider, the provider receives 30% of the sale proceeds.
You are likely to receive more for a home reversion plan than you would with a lifetime mortgage. You also benefit from any increase in the property’s value on the share you still own. When you die, the share you own is passed on to your beneficiaries. If the property’s value decreases, it shouldn’t impact you as much as it would with a lifetime mortgage where your interest continues to build up.
The main disadvantage of a home reversion plan is that you no longer own all, if any, of your property. Also, the proportion of your home that is sold to the provider is done so considerably under the market value. If you decide to buy back the share you sold, you will be charged the full market value. If you die shortly after taking out a home reversion plan, it means you’ve basically sold that part of your home very cheaply. Check to see if capital protection is available with the plan. This provides a rebate if you should die within the first few years of entering into the agreement. However, capital protection can only be utilised if you have selected it from the start and it reduces the amount of money you receive.
Which type of equity release is best for you?
It’s best to speak to your financial adviser about all of your options before making a decision. Your adviser can detail the regulations and protection in place for each equity release product and advise you on factors relating to your age, needs, circumstances and property.