There are two primary types of equity release available to homeowners. They are lifetime mortgages and home reversions. Both have their unique advantages, but lifetime mortgages have quickly become the overwhelming favorite for those who are in the market for an equity release scheme.
A lifetime mortgage is a loan you secure against your property. You receive a cash payment, or multiple cash payments, that you can spend however you’d like. The full loan payment, including capital and any interest is due when the home is sold. That typically takes place when the last remaining homeowner either passes away or moves into long term care.
There are different types of lifetime mortgages available, which is one of the reasons they are so popular. Some plans offer a great deal of flexibility and even allow the homeowner to repay the interest and/or capital to help control the overall loan balance. There are four primary types of lifetime mortgages: lump sum, enhanced, drawdown and interest only.
A lump sum plan is the core product of all lifetime mortgage schemes. With this type of plan, you get a one-time cash payment and the interest rolls up and compounds. You simply repay all of the loan, along with the interest, when the home is sold.
An enhanced plan requires an additional layer of eligibility. In order to qualify for this plan, you must have a qualifying health condition or lifestyle choice that shortens your life expectancy. With these plans, you are likely able to receive a higher lump sum payment or a lower interest rate. The amount you are eligible to receive typically increases with the severity of the condition(s).
A drawdown plan allows you to withdraw funds in smaller increments. So, you find out how much equity you are eligible to release, take your initial lump sum payment, and the remaining balance is placed in a cash reserve facility. You are able to withdraw funds from that facility as you need them. One of the greatest benefits of this type of plan is that you only accrue interest on the amount of cash you have received and not the full amount in the cash facility. That is because with all lifetime mortgage products you only ever pay interest on the amount you have actually received.
With this type of plan, you receive your lump sum payment but then make payments against the interest accruing on the loan. This can help to control the overall balance and limit the amount that is due when the home is sold.
Home reversions are quite different from lifetime mortgages in that they are not loans. Instead, you sell off a percentage of your home to the lender. In exchange, you receive a cash payment. That cash payment is likely not the same as what you would receive if you sold the home in a more traditional way. That is because you are still able to stay living in the home without having to pay any rent.
When the home is finally sold, again when the youngest homeowner either moves into long term care or passes away, the proceeds from the home are divided according to the ownership percentages. For example, if you sold off 40% of the home to the lender, the lender would receive 40% of the sale proceeds while you would receive 60%.
The greatest benefit with home reversions is that you can safeguard inheritance for your loved ones, which is one of the primary reasons these plans used to be so incredibly popular. Most of the decline in popularity is strictly related to the many options available through lifetime mortgage products. The features that made home reversions popular still exist.
There are some similarities with lifetime mortgages and home reversions. The two primary similarities are that they both allow the homeowner to stay living in the home without having to pay any rent. Secondly, the homeowner receives a tax-free cash payment that can be spent in any way.
The primary difference between a home reversion plan and a lifetime mortgage is in their actual structure. A lifetime mortgage is a loan, which means that when it comes due, you will owe both the capital amount you borrowed and the interest that has since accrued. With a home reversion plan, there is no loan. This means that when the home is sold, you simply split the proceeds.
Both lifetime mortgages and home reversions can offer a level of financial freedom for those in retirement. Depending on your individual needs, we can work with you to determine which might be the best option for your specialized needs. Reach out to us today for a free consultation.