How it works
There are two types of equity release plan, and the lifetime mortgage is one.
How a lifetime mortgage works:
- A lifetime mortgage is a loan against the value of your home.
- The lender gives you a lump sum, a monthly income, or a combination of both.
- Depending on the product, you either make payments of interest during the term or you make no payments and the interest is rolled up and repaid when the house is sold.
- When you sell your home, you repay the amount you borrowed plus any interest that has been rolled up over the years.
With a lifetime mortgage, you take out a loan against the value of your home. The lender gives you a lump sum, a monthly income or a combination of the two. If you take out an interest-only lifetime mortgage, you pay the interest on the loan as you go along and repay the loan when the house is sold. If you take out a rolled-up loan, however, you do not make any payments on a lifetime mortgage until the property is sold. Instead, the interest on the loan is added to the total owing.
Because interest is rolled up in this way, the amount you will need to pay back when the property is sold can grow very quickly. Of course, the value of your property could go up even faster than the amount you owe. This could reduce or even eliminate the effect of rolled-up interest on the amount of equity you have in your property in the future.
Conversely, if property values fall, interest will erode the equity in the property much more quickly. Never forget that there is no guarantee that property values will rise in the future. If you live in your property for some time after the plan is taken out, or if property values fall, it is possible that you will have no equity in your home, and therefore nothing for your beneficiaries to inherit.
There are two types of equity release plan, and a home reversion scheme is one.
How a home reversion plan works:
- You sell a share of your home to a reversion company.
- You receive a lump sum or a regular income.
- You do not have to pay any rent to live in your home, even though you no longer own all of it.
- When your home is sold, the reversion company receives the agreed percentage of the sale price of your home.
With a home reversion scheme, you sell your home - or, more usually, a part of it - to a private company called a 'reversion company'. You do not, however, receive the full market value as you would if you sold your home on the open market. Instead, the reversion company gives you a lump sum and the right to live in your home, rent free, for the rest of your life. Depending on factors such as your age and the value of your property, you may only receive 35% or even less of the market value of your home - and you will rarely receive over 60%. With a home reversion scheme, when your home is sold, the reversion company receives their share of the proceeds from the sale. If you sold a 50% share of your home to the reversion company, it will receive 50% of the proceeds. These plans are only available if you are over 65.
This site contains generic advice on these products to help with a better understanding of their possible benefits to you. We recommend that you seek Independent Financial Advice from an authorised adviser before proceeding.