Equity release has become more and more popular over recent years as people nearing the age of retirement look for ways to free up some money that is tied up in their home.
The two main products under the umbrella of equity release are Lifetime Mortgages and Home Reversion Plans.
There are big differences between lifetime mortgages and home reversion plans and which one is correct for you will depend on your own circumstances. Whether you are willing to sell a percentage of your property will be a big deciding factor.
What are the differences between the two though?
A lifetime mortgage is a loan that is secured against your property. Unlike a traditional loan or mortgage, there are no repayments that need to be made. Instead once you pass away or enter into a long term care facility, your home will be sold and the proceeds are used to pay back your loan.
Interest is accrued and you can either choose to add this onto your total loan amount or you can make monthly payments to cover the interest.
To obtain a lifetime mortgage you must be over the age of fifty-five, or if it is a joint application both parties should be over this age. Some lenders will agree to a lifetime mortgage if one person is under the age of fifty-five, however it would then require them to transfer their share of the equity to the older applicant.
What are the requirements for a lifetime mortgage?
There are no credit checks involved as technically you do not need to make any repayments.
Eligibility is based on –
- Your age – Typically the older you are the more you borrow against your home.
- Value of the property – The amount that you can borrow will be dependent on the value of your home. Most lenders ask that the property be worth at least £70,000. The higher the value of your home the more you can borrow.
Home Reversion Plan
A home reversion plan is where you sell part or all of your property to a home reversions plan provider in return for a cash lump sum. This will normally be a higher amount of money than you would be able to raise with a lifetime mortgage.
A lifetime tenancy is then drawn up ensuring that you are able to live, rent free, in your home until you pass away or enter into a long term care facility.
As this is not a loan or a mortgage there are no repayments.
However if your property does increase in value you will only benefit from the proportion that you still own. When the time comes for the property to be sold the proceeds from the sale will be split in accordance with the percentages that were agreed between you and the lender.
What are the requirements for a home reversion plan?
- Age – You must be at least sixty years old.
- Value – Your property must be valued at £80,000 or over. The more that your home is worth the more money you will be able to raise.
- Your health – Your health will affect the amount that the lender will pay you for a percentage of your property. Typically those in poorer health will receive a higher amount.
What are the key differences between lifetime mortgages and home reversion plans?
|Lifetime Mortgage||Home Reversion Plans|
|Retain full ownership of the property||You retain ownership of the percentage of the house that you have not sold. However a lifetime tenancy is drawn up, ensuring that you can continue living in your home.|
|It is a mortgage, however no repayments need to be made until the property is sold.||No repayments will be needed either before or after the sale of the property.|
|Interest is added and can either be paid off with monthly payments or can be rolled-up and added to your total loan amount.||No interest added.|
|Inheritance for any beneficiaries will be greatly reduced.||Inheritance for any benefits will be reduced dependent on what percentage of your property you sell.|
As you can see there are big differences between lifetime mortgages and home reversion plans and which one is correct for you will depend on your own circumstances. Whether you are willing to sell a percentage of your property will be a big deciding factor.
If you are unsure which is the best option for you then consulting with a financial advisor could help bring some clarity. There are many that specialise in retirement planning, ensuring that you get the most out of your retirement.