More and more airtime is now being given by various insurance and mortgage companies selling Equity Release Plans, which are principally Lifetime mortgages and Home Reversion Plans. When making a decision, it is important to understand the difference between the two types of schemes most commonly offered including the benefits and disadvantages involved. Regardless of any initial concept you may have, it is essential that you fully understand both the advantages and pitfalls of Equity Release and the need to take financial advice in order to determine whether an alternative method of funding may be more appropriate for your circumstances and needs.
We at Grower Freeman are happy to have an initial meeting with you for which we do not charge for the first 45 minutes in order to ensure that no undue influence from any third party, including family members, is being exercised and that you have an appreciation of the complications involved.
A Lifetime Mortgage will normally be in the form of a loan for the rest of your life and thus releasing capital which would otherwise be locked up in your home, with the debt only being repayable on your death or the death of your partner/surviving spouse. Any money which would then be left over after repayment of all borrowed capital and interest charges would be paid to your beneficiaries/heirs.
In addition to providing the lump sum, the other benefits include:-
- Protected equity. You could decide to protect an amount of the equity in your home, which means that your beneficiaries would be entitled to the appropriate percentage concerned. However, this is not a guaranteed amount from the proceeds of sale.
- No negative equity guarantee. Once your home is sold and if the proceeds after deductions are not sufficient to pay the amount due to the original lender, the lender will not ask the beneficiaries to repay any shortfall.
- Retained ownership. During the course of the Lifetime Mortgage you will remain in full ownership of your home until it is sold. This means that you will continue to have the obligations of repairing, maintaining and insuring your home.
- The possibility of borrowing further cash in the future subject to criteria.
- Reducing the level of Inheritance Tax (IHT) payable on death.
The disadvantages of a Lifetime Mortgage are:-
- The amount of inheritance for your beneficiaries is reduced.
- The initial loan will increase over time as interest is rolled up and added on a cumulative basis.
- Early repayment charges can sometimes apply.
- Eligibility for means-tested benefits may be affected.
- Generally you cannot raise as much capital as with some Home Reversion Schemes, to which reference is made below.
Home Reversion Plan
When making any decision it is important that you are able to compare the benefits and pitfalls of a Home Reversion Plan, which involves a third party (normally a company) either buying or arranging for someone else to buy part of or all your home. With this scheme, you would be provided with the net sale proceeds which you could choose to receive by way of regular instalments or as a single lump sum, which would in the case of the latter provide you with the option to invest as a way of providing future income. Unfortunately, with such a scheme you would normally receive less than the full market value of your home, typically between 20%-60% simply because the buyer cannot re-sell your property until you either die or move. Generally speaking, the older you are the higher the value of the property will be payable.
The benefits of a Home Reversion Plan are generally as follows, namely:-
- You can guarantee a percentage to be left to your family for inheritance purposes.
- There are no monthly repayments to meet.
- You will benefit from the rise in property values based on the percentage of your ownership.
- There is no interest to accumulate as is the case with a Lifetime Mortgage.
- The older you are, the more money can be released.
- The general criteria is that you would need to be 65 or over to be eligible for a Home Reversion Plan.
The disadvantages of a Home Reversion Plan is that:-
- The Home Reversion Scheme provider would benefit from any increase in the value of your property.
- You will no longer own your house as you will have sold a percentage to the Home Reversion Scheme provider.
- As previously indicated, it is most unlikely you will receive the full market value for the share of the property you have sold.
- If you were to die shortly after entering into the Scheme this would likely reduce the value of the Estate by more than that of a Lifetime Mortgage.