You borrow a set amount of money against the value of your home in the form of a mortgage. This is normally in the form of one lump sum, a regular income or both. There are now plans available that will allow you to take money out as you need it, which could be advantageous in minimising the amount of interest owed.
As long as any outstanding mortgage is settled first, you can then spend the money you release as you wish. The best way to visualise it is to think of it as a long-term loan, secured against the value of your property, that is paid off when your home is sold. These schemes are sometimes called equity release mortgages
You and your partner continue to live in your home and have no interest to pay at all during your lifetime. Instead, "compound interest" is added or "rolled up" with the loan. The whole debt is then paid off using the proceeds from the sale of the property when the last survivor dies, or moves into a nursing home.
If you are borrowing with your spouse or your partner or somebody else, the property will be sold following the last surviving of you dying or moving into long term care. Any money left over would belong to your estate.
This is different to a Home Reversion where you sell your home or a share of it to a reversion plan company, in
return for a lump sum or a monthly income (or a combination of
both).
It is always recommended that you seek Independent Legal Advice before entering into any equity release scheme.
Advantages
- Some lifetime mortgage schemes are available to those as young as 55 with most typically offering products to people aged 60 onwards.
- You keep ownership of your own home and could still benefit from any rises in house prices.
- You know how much money you will receive from the scheme at the outset.
- Possibility of leaving some equity to your heirs, depending on the size and length of your loan.
- Regulated by the Financial Services Authority
Disadvantages
- Your overall debt will grow over time, although this can be limited by only releasing money you need when you need it.
- The entire equity in your property may be exhausted, leaving nothing for your family.
- As you do not repay anything until the end of the loan, interest is added to the amount owed. You will therefore start to pay interest on this as well. As a result the total amount you owe will grow more quickly than it would with a loan where you are paying off interest during the life of the loan
- If you choose to repay the loan early, early repayment charges may apply.
- Your tax position and eligibility for means tested benefits may be affected, as might your options for moving or selling your home in the future.
Technically you become a tenant, albeit with the right to continue living in your home rent-ree (or sometimes for anominal rent) for the rest of your life. Home Reversion Plans are not equity release mortgages and there is no interest to pay, unlike lifetime mortgages, where although there is no interest to pay the interest rolls up.
When the property is sold – usually when you die –the reversion company gets its payout. If, for example, you sold50% of your property to the reversion company, it gets 50% of the
proceeds – including any growth. If you sold 25% of your property, it gets 25% of the proceeds, and so on.
In addition, the reversion company will also only pay you a percentage of the current market value for the share of your property it buys. This is because you get to carry on living in the property until you die, and the company may have to wait years for its return.
If you sell all of your property to take up a home reversion scheme, for example, you will typically get between 30% and 50% of its current value. It will rarely be more than 60%. The actual figure will depend on your age (and your partner’s). Older people
will get more, and men get more than women – because of differences in how long they are expected to live.
If you are borrowing with your spouse or your partner or somebody else, the property would be sold following the last surviving of you dying or moving into long term care. Any money left over would belong to your estate.
It is always recommended that you seek Independent Legal
Advice before entering into any equity release arrangement.
Advantages
- No ongoing repayments to make, the reversion company makes
all of its money when the property is sold.
- You know at outset what share of your home (if not its value)
you will be leaving to your family.
- You continue to share in any rise in the value of your
property (unless you have sold its entire value).
- You can take extra cash advances, depending on the amount you
originally took.
Disadvantages
- The home reversion company will buy at a discount to the current
market value.
- The big discount at which the reversion company will want to
buy makes these schemes less suitable for people in their 60s.
Typically, you do not receive the full market value of the share
of the property you sell because the home reversion plan company
will give you the absolute right to live in it rent free for the
rest of your life, therefore the younger you are the longer it
will take the home reversion plan company to receive their money
back.
- If you die soon after taking out a plan, you could
effectively have sold off your house (or a share of it) on the
cheap. Some schemes give families a rebate if you die within the
first few years of signing up.
- Reversion companies can be choosy about the properties they
take.
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