We offer you a quick overview of Equity Release Plans on this page,
so that you can quickly get up to speed on the various plans features,
pros and cons.
Home Reversion Plans These plans have about 25% of the UK market but are expected to increase in popularity as the Government has decided that they will be regulated by the FSA. Features You sell your home or a share of it to a reversion company for a lump sum.
In return you get a monthly income (or a combination of both).
You have the right to continue living in your home rent-free or sometimes for a nominal rent, for the rest of your life.
When the home is sold, usually upon moving into long-term care or death, the reversion company gets its payout.
If you sold 100% (full reversion) of your home to the reversion company, it gets 100% of the proceeds, including any growth.
Alternative, if you sold 50% (partial reversion) of your home to the reversion company, it gets 50% of the proceeds, again including any growth.
The reversion company will also only pay you a percentage of the current market value for the share of your home it buys.
This is because you get to carry on living in the home until you die, and the company may have to wait years for its return.
If you sell your entire home to the reversion company, you will typically get between 30% and 60% of its current value, dependent upon your (and any partners) age.
Older people will get more, and men get more than women – because of differences in how long they are expected to live.
Benefits • You can usually raise more cash than under a Lifetime Mortgage.
• By retaining a percentage ownership in your property, you know that you can leave it as an inheritance.
• If you only release part of the equity you know that you are able to release further amounts in the future, capitalising on any increase in the value of your property.
• There is no debt or new financial obligation.
• You are usually eligible for a Home Reversion plan between 65 and 80 years of age.
Considerations • You will not benefit from any appreciation in the value of the proportion of the property that you sell.
• You will no longer own all of your property.
• As the discount at which the Home Reversion plan is arranged is based on your age and life expectancy, a Home Reversion plan may be poor value if you die or move into care early.
Full Reversion Plans Full reversion means that you sell your entire home to a reversion company. Benefits No monthly repayments.
Family share of home determined at outset.
Plan provides cash lump sum and/or partial payments.
Bigger payment if suffering impaired health.
House removed from estate for Inheritance Tax purposes.
If death occurs shortly after signing up, possible rebate goes to family.
Considerations Home is bought at discount so less suitable for people in their 60’s.
If death occurs soon after taking out a plan, it could be poor value for money.
Reversion companies may not buy unusual properties and/or in certain locations.
When the home is sold, decision cannot be reversed.
Partial Reversion Plans Partial reversion means that you sell part of your home to a reversion company. At a later stage, you may be able to sell another portion of your home. Benefits No monthly repayments.
You share any rise in home value.
You can sell more of the home to get extra cash.
Bigger payment if suffering from impaired health.
Percentage of house sold is removed from estate for Inheritance Tax purposes.
If you die shortly after signing up, a possible rebate goes to family. Considerations Home is bought at discount so less suitable for people in their 60’s.
If you die soon after taking out a plan, it could be poor value for money.
Reversion companies may not buy unusual properties and/or in certain locations.
Interest-only mortgages These are similar to conventional equity release plans for younger people, except that the capital borrowed is eventually repaid from the sale of your property, rather than from an independent savings vehicle. Features You borrow a lump sum secured against the value of your home.
You pay interest each month, but you have a lump sum to spend as you wish.
The capital is eventually repaid out of the sale proceeds.
Benefits Amount owed is fixed so any increase in home equity is yours.
Fixed rate borrowing gives certainty to monthly payments.
Considerations Interest payments must be made.
Part of the loan may have to fund the interest payments.
Variable rate loans can be risky if interest rates rise.
Home income plans The current low interest-rate environment gives poor returns from annuities, which means that these plans are only really suitable for elderly people. Features You take out a mortgage against your home.
The money is used to buy an annuity which guarantees you an income for life.
Mortgage payments are deducted from this monthly income and the remainder is yours.
The mortgage is eventually repaid out of the home sale proceeds.
Benefits Regular income for life.
Mortgage interest deducted automatically.
Amount owed is fixed.
Any increase in home value belongs to you.
Possibly purchase competitive annuity elsewhere.
Considerations Not suitable for those looking for a substantial lump sum.
Fixed income is eroded by inflation.
Built-in annuities are not necessarily competitive.
Low annuity rates mean plans only suitable for elderly homeowners. Roll-up mortgages These are currently the most popular type of plan, accounting for some 60% of the Equity Release market for older people. Features The lender gives you a lump sum or monthly income (or both).
You pay nothing – the interest is ‘rolled up’ into the loan.
The amount borrowed plus this interest is repaid out of the proceeds from the sale of the home after you die.
How much you can borrow depends on the value of your home and your age.
The older you are, the higher the percentage of your home’s value you can borrow.
Generally, you will not be advanced more than 50% of the value of the home.
Benefits No interest payments to be made.
Higher income pro-rata, compared to interest-only mortgage or home income plan.
Usually lower risk fixed-interest loans.
Mitigate Inheritance Tax for estates over the IHT threshold.
Plans for people aged 55 and above.
Roll-up mortgage provider signed up to the Mortgage Code.
In some circumstances, top-up loans.
Considerations Uncertainty about how much will have to be repaid at the end.
Uncertainty about how much equity will be left for your family.
Interest payments can mount up quickly reducing inheritance.
Interest rates can be high.
Top-up loans may not be available later.
Shared appreciation mortgages These plans are not widely available at present but have been popular in the past and may be again in the future. Features You borrow a lump sum based on the value of your home.
There are no repayments until you die or the home is sold.
Then the amount you originally borrowed is paid back plus an agreed percentage of the amount by which the home has increased in value.
Benefits No regular repayments to make.
Loan may cost nothing if home’s value has not increased or fallen.
Considerations If house prices rise strongly, the effective cost of the loan could be very high.
If house prices rise strongly, you may be effectively ‘locked’ into your current home.
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