As an Equity Release specialist, these are questions that I am asked very frequently (“Reverse mortgage” is the American term for equity release, which can cause initial confusion)! The simple answer? There isn’t one.
Why? Equity release is a complex process and the results can vary depending on your home, your age, your current financial situation and how much cash you want to withdraw. Without careful consideration, any equity release scheme – or reverse mortgage – can be a fantastic opportunity or a financial disadvantage – which is why it’s so essential that you take professional, impartial advice before signing up.
Over the last decade or more, house values have increased at a staggering rate while incomes have struggled to keep pace. This means that a vast number of homeowners have more wealth tied up in their homes than in their savings accounts.
Once retirement hits, those relying on a state pension may find that their reduced income causes a significant drop in quality of life and that they can no longer afford the larger purchases they are used to. Equity release provides an alternative source of funds, converting the wealth that’s locked up in your home into cash – without you having to move out.
There are two main options with equity release; lifetime mortgages and home reversion plans. In either case, any money that you borrow will not need to be repaid until you move into long-term care and sell your home, or pass away.
What is a lifetime mortgage?
In a nutshell, a lifetime mortgage is a form of tax-free equity release that secures a loan against your home based on its value. Lifetime mortgages offer some flexibility in terms of payment structure, with a lump sum or monthly instalments allowing you to receive money how you’d like.
With the security of keeping your home, you typically have the option of releasing between £10,000 and £100,000. Use our equity release calculator to see how much you could release. If there is still some mortgage to pay on your home, the money you release will pay this off first.
Once the outstanding mortgage has been redeemed, it’s up to you how you spend the money after that. Common uses for lifetime mortgage equity include home improvements, travel and helping your children to get on the property ladder.
- Tax-free lump sum
- You keep ownership of your home
- Flexible equity release; lump sum or regular instalments
- Continue to live in your home or you are free to move house
Home reversion plans
Home reversion plans allow homeowners to sell some or all of their property for cash in retirement while still living there until death or going into care. It applies to over 65s, provides a tax-free lump sum or income and your family gets your share of the proceeds from the sale of your home when the time comes.
The exact figures should be calculated by a financial advisor but it’s common for 25% of your home’s current market value to be released. This percentage may rise depending on your age, with more becoming available to those who are older. Home reversion plans can be used to pay for your care, pass on as inheritance or help make the most of your retirement.
Both options allow you to protect a certain portion of your property value so that it can be passed on through inheritance and, depending on the scheme you choose, you may be able to pay back interest or small amounts to limit the final repayment sum. However, the main difference is that a lifetime mortgage means your home remains yours while a home reversion plan means you no longer own all of it.
When might another option be more suitable?
Downsizing is a popular alternative to equity release, although it comes with the requirement of leaving your family home, which not everyone is prepared to do. Households that are currently receiving (or are planning on receiving) any means-tested state benefits may also find that equity release impacts their eligibility.
There may be many factors as to why certain equity release schemes will or won’t be suitable, which is why it’s essential to talk your decisions through with family members, close friends and – most importantly – an impartial financial advisor.
Contact me for more information
The UK equity release market is growing by about a quarter each year. If you are considering the potential of equity release (or a ‘reverse mortgage’) to enjoy a more comfortable lifestyle in your later years, there is a wealth of different products and schemes available to suit all kinds of situations.
For more information, please contact me or email me at
email@example.com and we can take a look at your options. Initial consultations are always free of charge and without obligation, and you are welcome to visit our office in Worthing or I can arrange to meet you at your home.