What are the differences between lifetime mortgages and home reversion plans?

What types of equity release product are there?

There are two types of equity release available – lifetime mortgages and home reversion plans.

What is a lifetime mortgage?

A lifetime mortgage is a form of equity release in which you take out a loan based on the value of your house. You have the option of receiving the money in one lump sum, drawdown payments when you like or monthly instalments. You retain ownership of your home and repay the loan when it is sold after your death or when you enter long-term care.

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How does a lifetime mortgage work?

A lifetime mortgage is a loan that secured on your house. You get a tax-free cash sum to use however you want while still owning your house.

You are charged interest on the money you have borrowed which can be paid regularly to keep the balance low or you can make no payments and let it add onto your mortgage balance.

You have the guarantee of being able to stay in your home until you die or enter long-term care. Your house is normally sold at this stage, and the proceeds are used to pay off the loan.

You can release from £10,000 upwards with a lifetime mortgage. To find out how much you will free up, use our lifetime mortgage calculator.

You can choose between an equity release plan that allows you to take all of your money at once or a plan that allows you to take smaller amounts as needed. They are called Lump Sum or Drawdown lifetime mortgages.

If you ever owe money on your home, the money you release from an equity release mortgage will be used to pay off your mortgage first. The rest can be used for whatever reason you wish such as a holiday, home renovations, or helping your children get on the housing ladder.

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What are Home Reversion Plans?

A Home reversion Plan involves you selling some or all of your home to a home reversion plan provider in exchange for a cash lump sum. You can normally borrow more money on a Home Reversion Plan in comparison to a lifetime mortgage. Although all or part of your home will be owned by someone else, you will be able to live there rent-free for the rest of your life either until you pass away or go into long term care.

Since home reversion plans are not loans, there is no need to pay interest. You can only benefit from the increase in value of the property if you still own a portion of the property and have not sold the whole property to the Home reversion Plan provider.

Equity release isn’t appropriate for everybody. It can affect your eligibility for government benefits and reduce the value of your assets. It will also reduce the amount of inheritance you leave to your family.

Home reversion Plans are not as popular as Lifetime mortgages because most people enjoy keeping ownership of their property.

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What are the differences between lifetime mortgages and home reversion plans?

The main distinction between the two is that you retain ownership of your house with a lifetime mortgage. On the other hand, home reversion plans require you to sell all or a portion of your home in exchange for a lump sum of money.

The other major distinction is that for a lifetime mortgage, the interest accumulates over time as compound interest. This basically mean your mortgage balance increases every month. Home reversion Plans do not accrue interest because they own part or all of the property. The amount you’re given for the percentage of your property you’re selling is based on how long the reversion company anticipates the plan would last.

Key differences between lifetime mortgages and home reversion plans

Lifetime mortgage:

  • It’s a mortgage, but you don’t usually have to make any repayments during the lifetime of the mortgage unless you choose to do so.
  • The interest on the mortgage is usually rolled up and added to the mortgage, although with some products, you can choose to pay the interest if you wish.
  • The mortgage is usually paid back when you die or move into long term care.
  • Early repayment charges could apply if you choose to pay back the mortgage early.

Home reversion plans:

  • The provider buys a share (or all) of your property in exchange for a lump sum or regular income. The amount you receive will be less than the current market value of your property as you retain the right to live there, rent-free until you die or move into long term care.
  • When the property is sold, the provider receives their share of the sale proceeds based on the share you have sold.
  • If you choose to buy back the share of the property you sold to the provider, you would have to do so at the full market value.
  • You have the right to live in the property until you pass away or go into long term care.

Things to consider before applying

Taking out a lifetime mortgage is a huge commitment, and it isn’t right for everybody. You should carefully weigh all of your choices.

Keep in mind that raising a mortgage on your home will reduce any inheritance you leave. It may affect your tax situation and your eligibility for state benefits like pension credit, savings credit, and even council tax gain.

Know that even though you chose not to make payments over your lifetime, your equity release mortgage loan will accrue interest over time.

If you and your partner are eligible for a lifetime mortgage, it could make a significant difference for your quality of life. However, before making a final decision and taking out an equity release mortgage, you should consider other options for raising funds for later life. Consider the following scenario:

  • If you’re willing to downsize, you could sell your home and downsize to a smaller, less expensive home, allowing you to access the equity in your home. Don’t forget that you’ll have to pay stamp duty and other fees.
  • You might consider taking out an unsecured loan or remortgaging and repaying it over the course of your life.
  • You could contribute any savings or investments you have to your retirement fund.
  • There are many government grants or benefits that you may be eligible for in order to satisfy your requirements such as home improvement grants or pension credit, etc.

Is there anything else I should know?

Yes, indeed. Both equity release products reduce the amount of money left in your property when you die, and they can impact your eligibility for government benefits and your tax situation.

Before making any decisions regarding equity release goods, we suggest that you speak with one of our expert advisers.

Take a look at the latest protections and regulations in effect or visit the Equity Release Council’s website if you want to learn more about how your interests are secured.

Mortgage Saving Experts provides equity release guidance that can assist you in determining whether or not an equity release is right for you. We would be happy to talk to you.

Be careful of taking equity release and then claiming benefits

The term “deprivation of properties” refers to a form of benefit fraud. This occurs when a person receives benefits and then falsely lowers the value of their savings by giving or spending it. You may be prosecuted for possible fraud if you take out equity release, spend or give money away, and then receive benefits. Any expenditures you have made, as well as the reasons for them, should be reported to the Department of Work and Pensions. Home renovations, loan repayment, and funds for mobility aids are all likely to be handled differently and seen as fair spending rather than an attempt to defraud the benefits system.

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Do I have to make monthly repayments?

Since the interest is rolled up and added to the loan sum, you don't have to make monthly payments. This is repaid when you pass away or enter long-term care. On the other hand, if you have the ability to make payments to service the interest or even some of the capital then you can do this. If in the future, you no longer can afford to make payments to the lifetime mortgage you do not have to make any. Just call your lender and advise them and they will start to add the interest to the balance of the mortgage, so no payments are required.

What is the difference between a lifetime mortgage and a residential mortgage?

The majority of people are familiar with the term "residential mortgage." It's the kind of mortgage you get to help you buy a house and you make monthly payments over a period of time. Then depending on whether you are on repayment or Interest Only when the term ends you either have no mortgage or need to repay the original loan amount and the mortgage ends.

A lifetime mortgage allows you to remortgage your current home or purchase a new one and you can choose whether you wish to service the interest by making monthly payments or choose not to make any payment s and let the interest roll up increasing your mortgage balance which helps if your retirement income is not enough to make repayments. This mortgage lasts until you either pass away or go into long term care.

Here are some of the key differences:

Term of your loan

There is no time limit for a lifetime mortgage. It lasts until you (or your partner or spouse if you have a joint plan) die or are placed in long-term care.

The mortgage term (or loan term) of a residential mortgage is set for a certain period of time (25 years).

Monthly repayments

There are no monthly payments for a lifetime mortgage, but this is an option with some plans.

Payments on a residential mortgage are made monthly.

How interest is charged

Compound interest, also known as rolled-up interest, is applied to the amount you owe per month on a lifetime mortgage.

This means that, even though the interest rate is set or fixed for life, the balance of your mortgage increases monthly, and you pay interest on that higher amount every month. Just remember, you can choose to make some payments to slow the increase of the mortgage balance of you wish.

Monthly payments on a residential repayment mortgage include both capital and interest.

Monthly payments on interest-only mortgages only cover the interest on the initial loan sum. At the end of the period, the balance of the mortgage must be repaid.

Affordability checks

A lifetime mortgage does not use an affordability calculation because they know you can just let the mortgage payments add to the balance.

When applying for a residential mortgage, your wages and outgoings are taken into account to ensure that you can handle the monthly payments.

Interest rates

The interest rate on the lifetime mortgage can be fixed for the duration of the loan.

A variable or fixed rate is available with a residential mortgage.

What is the difference between an equity release and a lifetime mortgage?

The term "lifetime mortgage" refers to a form of equity release that allows you to borrow money for the rest of your life. A lifetime mortgage and home reversion plans are the two key forms of equity release available. A lifetime mortgage allows you to retain ownership of your property. With a Home reversion Plan you sell all or part of your property therefore do not retain ownership of the whole or any of your home. These are the differences between the two.

What is a home reversion mortgage?

Home reversion plans paved the way for lifetime mortgages. You sell all or part of your house in exchange for a cash lump sum, recurring income, or both in a home reversion plan. The income option provides you with a regular income.

Are home reversion plans regulated?

Lifetime mortgages and home reversion schemes are the two types of equity release. The Financial Conduct Authority regulates both of these.

How do home reversion plans work?

You sell all or part of your house in exchange for a cash lump sum, a recurring income, or both under a home reversion plan. When your home is eventually sold, the reversion firm receives a portion of the sale earnings. They'll get all of the money if you sell the entire property to them. If you sell a portion of your home, say half of it, the reversion company receives that portion of the proceeds, allowing the remainder to go to your heirs.

Can I get more money from my house with a lifetime mortgage or a home reversion plan?

The amount of money you can expect to earn from a lifelong mortgage and home reversion plan is determined by the value of your home, your health, and your age. Some home reversion plans will purchase your entire property for between 20% and 60% of the original price. A lifetime mortgage may provide you with up to 60% of the property's worth, but if not paid back, it will accrue interest and eat into your remaining equity.

Which is safer a home reversion plan or a lifetime mortgage?

The FCA regulates both types of equity release and requires you to seek advice before taking up a product. Both products have risks, such as the possibility of negative equity with a lifetime mortgage (unless your lifetime mortgage is from a member of the Equity Release Council, in which case it will have a no negative equity guarantee) and not being able to benefit from future house price increases to the share you have sold under a home reversion plan. Both products will have an influence on the value of your estate, so any decision to seek equity release should be made in consultation with your family and/or estate beneficiaries.

Is a home reversion plan right for you?

After you've learned the differences between the different types of equity release plans, it's time to go deeper into the one that's suitable for you. Consider the benefits and drawbacks of a home reversion plan before making a decision.

Why might I consider equity release?

If you don't have a large enough pension account to last you through retirement, or if you don't want to downsize, equity release allows you to access part of the money locked up in your home while staying put. However, it is a costly kind of borrowing, and you may end up owing more than you thought. It's a good idea to get counsel to assist you thoroughly consider the ramifications before making a decision.
Want to know more?

For more details, call our Mortgage Saving Experts today.

Want to know more?

Get in touch with of our mortgage saving experts today to find out how we can help.

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