Article | May 2024
Homeowners over the age of 55 may often look for ways they can gain cash to fund early retirement, dream holidays, early inheritance and more. Equity release could be one of the financial tools available for people looking to get extra funds. This is because releasing equity enables homeowners to unlock value in their property.
There are different types of equity release options available to homeowners. At Responsible Life we have expert equity release advisers on hand to advise on releasing equity, your other options, and what you can do with equity release.
The type of equity release that our advisers help with is a Lifetime Mortgage, and they will also look at other mortgage options including a Retirement Interest-Only Mortgage and more traditional mortgages. Whilst they will be able to explain a home reversion plan, we don’t offer them as we don’t believe they represent good value for homeowners.
In this article, we will explain what a home reversion plan and Lifetime Mortgage is and how they compare versus each other.
A Lifetime Mortgage is the most popular equity release product. With our service, you will benefit from interest rates that are fixed for life and the choice to make optional repayments as standard.
There are two main product options for Lifetime Mortgages. The first product is the Lump Sum Lifetime Mortgage option. With this you release the equity available to you in one go, up to a maximum amount, calculated based on factors such as your age and the value of your home. You can use our free equity release calculator to work out how much this could be for you. The full amount borrowed, plus any interest not paid in your lifetime, is then paid back when you pass away or enter long-term care.
Alternatively, there is the second Lifetime Mortgage option. This is the Drawdown Lifetime Mortgage product. The difference with this product vs the lump sum option is that you can release a smaller initial amount from your home and then choose to place a further amount into an interest-free reserve. Interest is only charged on the reserve when funds are actually drawn down.
There are pros and cons with Lifetime Mortgages. However, you can have peace of mind in knowing that you can never owe more than the market value of your home when it is sold. Plus, you can make voluntary payments (or repayments) during your lifetime. This is usually penalty-free up to 10% of the initial amount borrowed per year, subject to lender criteria.
However, with a Lifetime Mortgage (as with other equity release options) the value of your estate is reduced. Interest on Lifetime Mortgages is applied on a compound basis, meaning it increases over time, and early repayment charges may apply if you wish to pay back the full amount owed early. Releasing cash from your home may also affect your entitlement to means-tested benefits.
A home reversion plan is another type of equity release, that makes up a tiny fraction of the overall market. At Responsible Life, we feel that they are a bad option for homeowners. This is why we do not offer them.
Home reversion plans involve giving up part of or all your home to a provider. This will often be less than the market value of your home. Once you have gone ahead with one of these plans, the provider owns a share or all of your home. This is then paid back when you pass away or enter long-term care.
For example, let’s say your home is worth £200,000. You might sell 25% for a £30,000 lump sum. When you pass away, assuming your home did not increase in value, the provider would receive £50,000 from the sale, representing their 25% share.
From a provider perspective, they will benefit from any potential increase in market value for your property. That is because the share of your home that they own will increase alongside the full value of the home.
So, when it comes to a home reversion plan vs Lifetime Mortgage, we believe that a Lifetime Mortgage option is best for homeowners thinking about equity release.
If you feel that you need any more information about Lifetime Mortgages, schedule a call with our Information Team today! They can introduce you to the service on offer and arrange a free initial consultation with one of our advisers.