Home Reversion or Lifetime Mortgage: Which is right for you?

If you're thinking about equity release, you might be wondering which type of plan is right for you. There are two main options to choose from: home reversion or lifetime mortgage. Both of these plans can help you release equity from your home without having to sell it, but they have different features and drawbacks. Which is right for you?

In this insight, we will consider the features of each and help you to understand which is the better equity release option for you.

Key Takeaways

• Home Reversion Plan: You sell a portion or all of your property to a provider in exchange for a lump sum or regular payments, and the provider becomes the legal owner of the portion of the property that you've sold. You retain full ownership of your property, and the maximum loan amount is based on your age and your property value. The eligibility is not based on your income and expenditure, and no mandatory monthly payments are required.
• Lifetime Mortgage: You release equity without having to sell your home, and the maximum loan amount is based on your age and your property value. You do not retain full ownership of your property, and the mortgage lender has a legal claim on your property. You have the right to live in your property for the rest of your life, and there is a fixed interest rate.
• The right option for you depends on your individual circumstances and preferences, such as whether you want to retain full ownership of your property and whether you want the flexibility to make voluntary payments or move house in the future.
• Both types of equity release plans have risks and disadvantages, so it's important to seek professional financial advice and carefully consider the terms and conditions before making a decision.

To make an informed decision, let's take a closer look at each option.

A home reversion plan allows you to sell part or all of your home to a lender in exchange for a lump sum or regular payments. You'll still be able to live in your home rent-free, but you'll no longer own the portion of your property that you've sold. This means that you won't benefit from any future increase in the value of your home, and you'll have limited flexibility if you want to move house in the future.

On the other hand, a lifetime mortgage allows you to borrow against the value of your home without selling it. You'll still own your home, and you'll be able to live in it for as long as you like. You won't have to make any monthly payments, but the interest on the loan will accrue over time and will be repaid when you sell your home or pass away.

Home Reversion Plan

A home reversion plan means you sell part or all of your property to a company and get money in return. You can still live there without paying rent for your lifetime, but the company becomes the legal owner of the part you sold. When you pass away or move into long-term care, the company gets its share of the sale and you or your family keeps the rest of the property.

Let's say you're a retired homeowner in the UK and you need some extra money to cover your living expenses. You have a house worth £400,000 and you're willing to sell a portion of it to a home reversion plan provider in exchange for a lump sum.

After speaking with a few providers, you agree to sell 50% of your property to a provider for £200,000. You can continue to live in your home for the rest of your life without having to pay rent, but the provider becomes the legal owner of the portion of your property that you've sold.

Features of a home reversion plan

• You keep your property: You get to stay in your home for the rest of your life and benefit from any increase in its value.
• The provider has a legal claim: The mortgage lender has a legal claim on the portion of the property it owns.
• Loan amount based on age and value: You can release more money if you are older and your property is worth more.
• No income or expenditure check: Your eligibility is not based on how much you earn or spend.
• No monthly payments: You don't need to make any payments to the provider while you're living in your property.
• Optional payments: You can make voluntary payments to reduce the amount of debt that builds up over time.
• Minimum age of 60: You must be at least 60 years old to apply.
• No maximum age: You can apply for a home reversion plan at any age if you own your property.
• Your right to live in your property: You can stay in your home for the rest of your life, and the provider can't sell it or ask you to leave.
• No fixed interest rate: The provider's share of the sale proceeds increases over time, but there is no interest charged.

Lifetime Mortgage

A lifetime mortgage is a loan secured against your property. It lets you release equity without selling your home. You still own your property, but the lender has a charge on it. This means that you must repay the loan when you die or move into long-term care. Some lifetime mortgages allow you to make interest payments. These can help reduce the amount of debt that grows over time.

If you're 65 and own a £500,000 property but need extra money, you could get a lifetime mortgage for £100,000. You won't have to make monthly payments, but the interest will be added to the loan balance each month. For example, with a 4% fixed interest rate, the loan balance would be £104,000 after one year. The lender will own a portion of the property, 20% in this case. When you die or move into long-term care, the property will be sold, and the lender will receive £100,000 plus any interest. If the property sells for more, your estate gets the remainder after the loan is paid off. For instance, if it sells for £600,000, your estate would get £500,000 plus any interest.

Features of a Lifetime Mortgage

• You don't retain full ownership of your property: The lender has a legal claim on your property.
• The maximum loan amount is based on your age and property value.
• Eligibility is not based on income and expenditure.
• No mandatory monthly payments are required.
• Voluntary payments can be made to reduce debt over time.
• Minimum age of applicants is 55 years old.
• There is no maximum age limit.
• You have the right to live in your property for the rest of your life.
• Interest rate is fixed for the lifetime of the mortgage.
• You can transfer the loan to a new property if you move house.
• Downsizing protection may be offered.
• Significant life event exemption may be offered.

Which option is right for you? Home Reversion or Lifetime Mortgage

To choose between home reversion plans or lifetime mortgages, consider your situation and preferences. If you want to keep full ownership of your property and are not worried about interest charges, a home reversion plan might work best for you. But if you want to keep full ownership of your property and have the option to make voluntary payments or move in the future, a lifetime mortgage could be a better fit.

It is worth noting that only 1% of applicants now apply for home reversion plans. This is often because lifetime mortgages provide more flexibility.

When deciding, here is what to consider:

Ownership

With a home reversion plan, you sell a percentage of your home to a reversion company, which means that you will no longer own the entire property. With a lifetime mortgage, you retain ownership of your property, but the lender has a legal claim on a portion of the property's value.

Lump sum or regular payments

Home reversion plans typically provide a larger lump sum payment upfront, while lifetime mortgages offer the option of regular payments or a lump sum.

Interest rates

Lifetime mortgages have fixed or variable interest rates, while home reversion plans do not accrue interest. This means that lifetime mortgages can become more expensive over time, whereas home reversion plans remain constant.

Eligibility

Both options have age restrictions, but home reversion plans typically require you to be older than for lifetime mortgages.

Inheritance

With a home reversion plan, your estate will only receive the percentage of the property that you still own when you die. With a lifetime mortgage, any remaining proceeds from the sale of the property after the lender is paid off will go to your estate.

Seeking advice on home reversion plans or Lifetime Mortgages

Getting the right advice on which equity release option is right for you is critical. Advice is personalised, so it's important to speak with a professional who can understand your unique situation. While there are different options available online, seeking guidance from an expert is essential to find the right solution for you. If you're considering equity release, we strongly suggest seeking financial advice to ensure you make the best decision for your future.

If you're not sure where to start with getting advice, complete the Equity Release Sunny Fact Find. The answers you provide help us to find the best-suited adviser for your needs. Your adviser then contacts you for a no obligation conversation on how they can help. You decide how to proceed.