By Tom Philips at September 10, 2022

Home Reversion Plan vs Lifetime Mortgage

If you have done some research into equity release, you will know that there are two equity release plans you can have: home reversions and lifetime mortgages.

Lifetime mortgages are much more popular than home reversions, with 99% of equity release customers taking this route. However, both schemes can be incredibly beneficial if you approach them in the right way.

In this article, we will explain what a home reversion and a lifetime mortgage is in great detail, before comparing the two equity release schemes.

We cannot tell you which one will be best for you until you get in touch with more information, but for now, we can discuss the pros and cons of each arrangement.

What is a Home Reversion?

A home reversion is a type of equity release that involves a homeowner selling their property to an equity release lender. The lender usually purchases the home (or a share of the home) for 20-60% of the market value (1).

It goes without saying that the percentage they settle on impacts the homeowner’s experience of equity release. This is because a lower percentage means the homeowner will lose out on more money, so their loan will be lower.

This is acceptable for some people who want to top up their retirement income to help with living costs, and who perhaps already have a decent income from their pension credit and savings.

However, if homeowners are in desperate need of a large sum of cash, they would need to find a lender who was willing to offer close to 60% of the market value of the property.

Advantages Of Home Reversions

Firstly, with a home reversion, you can continue to live in your property until you pass away or move into long-term care. This means the scheme is often very simple and easy for homeowners, as they do not have to deal with the stress of moving (2).

It is also beneficial for people who are set on staying in their location, whether because they live close to loved ones, close to nature, or close to certain amenities.

Secondly, home reversions allow you to access a sum of tax-free cash to fund your retirement, and as there are usually no affordability checks or credit checks, this is great for people who would not be eligible for an unsecured loan.

With a home reversion, pensioners can access a loan secured against their property that does not have to be repaid.

Finally, an advantage of home reversion schemes that does not apply to lifetime mortgages is the fact that there is no interest on the loan.

This is hugely reassuring for people who are anxious about the growing interest that comes with lifetime mortgages, and the impact this could have on inheritance.

Disadvantages Of Home Reversions

Firstly, as with any equity release scheme, opting for a home reversion means you are willingly getting into debt, even if the debt doesn’t have to be repaid until you pass away.

This may cause anxiety for some people as they may not feel able to spend their loan as they wish, with the knowledge that it is reducing the inheritance they can pass on.

Secondly, as you are selling your home for less than the market value, you are getting less money than you would get if you simply sold your home yourself.

Some people are not willing to do this, as they worry about the impact it will have on their finances, and they would rather make the most of their valuable home in a less risky way.

Finally, there are costs involved with home reversions that not everyone can afford. You must be prepared to spend thousands of pounds on advice fees, application fees, legal fees, administration fees, and often other processes that are essential for home reversions.

Who is Eligible For a Home Reversion?

To have a home reversion, you must be at least 65 years old as a general rule. However, some equity release lenders accept clients who are below the age of 65. You must also own your own property that is worth at least £70,000.

There are also other criteria that are considered, and you can find out more when you get in touch with us. Some examples are: you need to be releasing equity from your primary residence, and you need to not have an existing mortgage.

What is a Lifetime Mortgage?

A lifetime mortgage is exactly what it says in the name – a mortgage that you keep for the rest of your life. When you take out a lifetime mortgage with an equity release lender, you are committing to it until you die or move into long-term care.

We have explained that equity release lenders get their money from home reversions by offering less than the market value. However, with lifetime mortgages, lenders profit from your property by charging interest on your loan.

This interest accrues over the years, and unless you choose to repay it, it will be owed at the end of the scheme.

There are eight main types of lifetime mortgage, and these are: buy-to-let plans, voluntary repayment plans, income-only plans, second home/holiday home plans, enhanced/ill-health plans, drawdown plans, interest-only plans, and lump sum plans.

Advantages Of Lifetime Mortgages

Firstly, one advantage of a lifetime mortgage is that you will remain the owner of your home with this scheme. This is very important for many equity release customers, as they want to know that they can keep their valuable asset and not give it away to a lender.

Secondly, lifetime mortgages have plenty of variety, so there is a plan for almost anything you could think of. For example, if you want a fixed income paid into your account each month rather than a lump sum or ad-hoc withdrawals, you could have a fixed income plan.

For a lump sum, there is a lump sum arrangement. For a combination of lump sum and withdrawal, there is the drawdown plan.

Finally, it is never a requirement to repay the loan with a lifetime mortgage.

This means you do not have to worry about the debt you are in, as you can trust that the sale of your home will cover it. This is arguably less stressful than a traditional loan, which has to be paid back within a certain time frame.

Disadvantages Of Lifetime Mortgages

Firstly, with the benefit of not having to make repayments comes to the stress of knowing the loan is adding up. Some people have the income that is necessary to repay a traditional loan, and they find that this is less stressful as it means they don’t have to be in long-term debt.

Secondly, you can only take out a lifetime mortgage when you are 55 years old, so there are plenty of people who would benefit from this scheme but are simply not eligible. This also applies to people with properties that are not quite worth £70,000.

Finally, if you have a lifetime mortgage, particularly with a lump sum, it can render you ineligible for means-tested benefits from the state. This may make your income lower overall, depending on the benefits you are currently claiming.

Who is Eligible For a Lifetime Mortgage?

To have a lifetime mortgage, you must be 55 years old or more, and you must own a property worth at least £70,000. If you are applying for a joint mortgage with your partner, your partner must also meet these requirements.

Home Reversion Plan Vs Lifetime Mortgage: Which Scheme is More Profitable?

Generally, it will be more profitable to have a lifetime mortgage than a home reversion. This is because you are offered an amount lower than the market value with a home reversion.

If you opt for a voluntary repayment mortgage or an interest-only mortgage, the scheme can become even more profitable, as less compound interest is charged on the loan at the end of the scheme.

Home Reversion Plan Vs Lifetime Mortgage: Which Scheme is Safer?

You are taking a risk with both a home reversion and a lifetime mortgage, as you are borrowing money that is going to be taken back eventually.

However, we would argue that both schemes are as safe as one another as you know exactly what you are getting into.

The vast majority of home reversions and lifetime mortgages now come with a no negative equity guarantee, which means you will never owe more money than you borrowed.

Home Reversion Plan Vs Lifetime Mortgage: Which Scheme is More Widely Available?

Undoubtedly, lifetime mortgages are much more widely available than home reversions as they are more in demand. This means it will usually be easier to find an equity release lender offering a lifetime mortgage, but with the help of an adviser, you could also find a local home reversion provider.

Home Reversion Plan Vs Lifetime Mortgage: Which Scheme Has Lower Interest?

With a home reversion scheme, you do not pay any interest on your loan, so this scheme is superior for anyone who does not want to pay interest. You simply receive a one-off cash lump (or sometimes in monthly instalments) and then the money is yours to do as you please.

The interest rates on lifetime mortgages vary, but they are usually lower than interest rates with more traditional schemes. Some examples of plans where you would end up paying less interest are lump sum plans, drawdown plans, and interest-only plans.

Home Reversion Plan Vs Lifetime Mortgage: Which Scheme Has Lower Tax?

Fortunately, you never have to pay tax on equity release funds, whether you get a lifetime mortgage or a home reversion. Your family will also not have to pay tax on the money they inherit unless the amount exceeds the threshold for inheritance tax (which is uncommon).

Home Reversion Plan Vs Lifetime Mortgage: Which Scheme is Better Regulated?

Both forms of equity release are regulated very well, making them extremely safe. Equity release schemes are regulated by the Financial Conduct Authority (FCA) and the Equity Release Council (ERC).

This means if you need to make a complaint about how an equity release lender has dealt with you, you can do this easily. It also means that you can put your trust into the scheme, so when you sign off on it, you know that you will be protected if anything goes wrong.

Are Home Reversions and Lifetime Mortgages the Same in Every Country?

The general concept of equity release is the same all over the world, so it always involves releasing money from your property and receiving a secured loan that does not have to be repaid while you are alive.

However, it works slightly differently in every country. For a start, the equity release lenders will be different, and they may have different requirements for homeowners i.e. being younger or older than 55, and owning a property of a higher or lower value.

Another difference is that the scheme will be regulated differently. Most countries have institutions that regulate equity release, but they may work differently to the Equity Release Council and the Financial Conduct Authority.

Finally, the property types will be different, which means there may be more or less scope for equity release. For example, in a country with majority freehold properties, more people will be able to release equity.

However, if there are lots of leasehold properties, which often occurs when most people live in apartments, equity release may be a less popular option as it is harder to qualify for an equity release loan if you own a leasehold home.

I Don’t Know Which Scheme Is Right For Me – Can You Help?

Yes, we can certainly help you to make a decision about whether to have a home reversion or a lifetime mortgage. We have plenty of experience in helping our customers to decide on their preferences and work out which scheme is more in line with these preferences.

If you have already decided based on this article, we would be more than happy to explain how you can start to make an equity release application with an equity release adviser. Simply call us on 0330 058 1579 and we will tell you everything you need to know.

References

[1] The Difference Between a Home Reversion and a Lifetime Mortgage https://stbartsfinance.co.uk/home-reversion-and-a-lifetime-mortgage/

[2] What is a home reversion plan and should I use one in retirement? https://www.unbiased.co.uk/life/pensions-retirement/home-reversion