Information

Contents

Lifetime Mortgage
Home Reversion
Advantages and disadvantages of Equity Release
Comparative Advantages and disadvantages of Lifetime Mortgages and Home Reversion Plans

Lifetime Mortgage

There are two types of equity release plan, and a 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.
• You don’t make any mortgage payments until the property is sold.
• When you sell your home, you repay the amount you borrowed plus all the 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. Unlike a normal mortgage, 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.

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Home Reversion

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.

Advantages and disadvantages of Equity Release

Advantages:

• Equity release will make a substantial amount of cash available either as lump sum or regular income.
• No payments required from you (other than the initial charges).
• You remain in your home for the rest of your life if you wish.
• Further cash can be taken by equity release later (depending on how much you take now).
• You can usually still move home (subject to certain restrictions).

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Disadvantages:

• Equity release reduces the value of your estate, and the amount that will go to your beneficiaries on your death.
• Equity release products involve borrowing against or selling part of your home. There may be more suitable methods of raising the funds you need.
• Equity release schemes may work out more expensive in the long term than downsizing to as smaller property.
• Equity release may affect your entitlement to means-tested benefits and grants.

Comparative Advantages and disadvantages of Lifetime Mortgages and Home Reversion Plans

Comparative Advantages of a Lifetime Mortgage:

• You still own your home so all growth in the value (if any, of course) belongs to you.
• Plans can be taken out when you are as young as 55.

Comparative Disadvantages of a Lifetime Mortgage:

• The amount owed on the loan can mount up quickly.
• Interest rates may be higher than for normal mortgages due to the long-term nature of the loan.
• Further loans may not be available if you have already borrowed against a large part of the value, or if house prices were to fall.
• If for some reason you wanted to repay the loan early, there may be early repayment charges.
• If you live for a long time, or if house prices were to fall, there may be no equity left for your heirs to inherit.

Comparative Advantages of a Home Reversion Scheme:

• Unless you have sold 100% of your home, you continue to share in any growth in value.
• Further cash advances may be possible depending on the percentage you have already sold.
• You know the proportion of the value of your home that your beneficiaries will get.

Comparative Disadvantages of a Home Reversion Scheme:

• These schemes can take longer to arrange, and some companies are selective about the properties they consider.
• If you die shortly after starting the plan, you could have sold off a part of your home cheaply. Some schemes operate a rebate if death occurs within the first few years.
• When you sell a part of your home, you do not get the full market value.
• Lifetime mortgages are regulated by the Financial Services Authority. Home reversion plans are not yet regulated by them.

This advert refers to home reversion plans and lifetime mortgages. To understand the features and risks, ask for a personalised illustration.

You can choose how we are paid for mortgages: by commission (paid by the lender) and a fee of £350; or by a fee only, typically £800.

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