Lifetime Mortgages & Home Reversion

Lifetime mortgagesThere are various types of equity release mortgages on the market, each with it’s own niche and appeal and of course potential drawbacks, though generally they are described as

  • Lifetime Mortgages
  • Home Reversion Plans

Whilst we do not wish to add lots of content on the types of equity release mortgages out there, as it is generally best to discuss this when we speak but we feel it is wise to show the options:

Lifetime Mortgages

A lifetime mortgage is when you borrow a lump sum against the equity in your home, which is based on your age, loan to value and sometimes your health. There are generally no repayments made as the interest charged by the lender is rolled up and added on to the initial borrowing on a compound basis. The debt is then paid back when the borrower dies or enters into long term care.

There are different types of options within the lifetime mortgages umbrella:

  • Amounts can be drawn down to allow flexibility, ie, a maximum amount of borrowing or £40,000 may be offered by a provider, with only £30,000 required. The remaining amount may be drawn in the future should a borrower require it.
  • A worry of equity release is that, as the amount of borrowing rises each year, the exact amount is not known. A way of combating this is to arrange a lifetime mortgage on an Interest Only basis. This means that instead of the debt rolling up, it remains static as long as the interest is paid back on a monthly basis, this way the amount of debt is known and beneficiaries will benefit from any growth in the property value. Should payments become unmanageable, some providers will allow regular payments to stop with the plan reverting to a conventional “rolled up” lifetime mortgage.
  • Whilst there are generally strict rules on amounts borrowed, with these limits judged on age and loan to value ratio, should a client suffer from any health issues that may mean a reduced life expectancy, a higher amount may be borrowed than originally thought with certain providers
  • A inheritance guarantee is offered by certain providers which can solve the dilemma most have with equity release plans which is looking after beneficiaries. The guarantee means that a client can protect an amount of their home to pass on to beneficiaries, ie, if a client wanted 25% to pass on to his children, the initial borrowing calculation would be based on 75% of the property value and not the full 100%. When the client dies, 25% of the then property’s value will be passed on to the children.
  • All plans who adhere to the Equity Release Council standards will offer a “No negative equity guarantee” meaning that no matter how long a client lives for, the borrowing will never be more than the value of the home.

Lifetime mortgages are still the most popular type of equity release plans.

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Home Reversion Plans

This type of plan allows you to access all or part of the value of your property while retaining the right to remain in your property, rent free, for the rest of your life.  With a Home Reversion product the provider will purchase all or part of your house taking into account your age and your health and will provide you with a tax free cash lump sum (or regular payments) and a lifetime lease, guaranteeing you the right to stay in your property rent-free for the rest of your life.

You are able to live in the property as you would have previously but unlike the lifetime mortgage you effectively give up ownership of your home in exchange for a lifetime tenancy. This is the one key issue that puts many clients off this method of equity release.

Again, on death or entering long term care, the property is sold, with the deceased estate receiving nothing unless only part of the property was sold initially, in which the proceeds will be shared in the percentages stated at the time of set up.