Understanding Home Reversion Plans and Lifetime Mortgages
- Penn Financial
- Apr 16
- 3 min read
Updated: Jun 4
In this article, we will explore Home Reversion Plans and Lifetime Mortgages. These financial options provide unique solutions for homeowners, especially those over 70. Both plans can help manage your property equity effectively. However, it is essential to fully understand their implications.
Home Reversion Plans
Home Reversion Plans allow homeowners to sell a portion or all of their home. In return, they receive a cash lump sum and a Lifetime Tenancy in their property. This means that the client no longer owns that portion of the property. Typically, these plans are available only to homeowners aged 70 and above.
The main drawback is that the price offered for the property is usually significantly below the market value. However, for some homeowners, particularly those in financial difficulty, a Home Reversion Plan can be an attractive option.
Lifetime Mortgages
On the other hand, Lifetime Mortgages make up the majority of equity release business in the UK. These mortgages provide homeowners with cash lump sums based on their age and the property’s value.
One significant catch is that the loan interest is compounded. Over the years, this can lead to a considerable increase in the total amount owed. It’s crucial to weigh this factor carefully when considering Lifetime Mortgages.
Typical Amounts
When using a Home Reversion Plan, the homeowner sells their interest in the property. In many cases, the loan-to-value ratio can be as high as 75% or even more.
In contrast, with a Lifetime Mortgage, the amount of cash available at the outset is usually limited. This is often just over 50% of the property's value because the borrower is rolling up the interest.
An Example Scenario
Let’s consider an example. Suppose a person aged 75 owns a property valued at £400K. They also have a mortgage of £280K. That mortgage has reached the end of its term, and the provider is requesting full repayment.
If the homeowner has no resources to repay the loan, they face serious challenges. The current loan amount is 70% of the property’s value, making it too high for a Lifetime Mortgage. They have an option to move and realise a sum of £120K, but costs of sale will decrease that amount.
Finding another property within budget can also be daunting. Using the funds to pay rent offers only a temporary solution, as this money will eventually run out.
However, if the homeowner opts for a Home Reversion Plan and sells the property to the provider at 75% of the market value, they can clear the existing mortgage. This arrangement allows them to have £20K in savings.
Without a mortgage payment, their disposable income increases. While they no longer own their home, they will be secure as a tenant for life. This can lead to an improved quality of life due to reduced financial strain.
Important Considerations
It is important to highlight that both Home Reversion Plans and Lifetime Mortgages are complex products. They require careful consideration. Seeking expert advice is crucial before making any commitments.
These options should be discussed with every client over the age of 70 as a possible route. Understanding the benefits and drawbacks can help in making better financial decisions.
Conclusion
In conclusion, both Home Reversion Plans and Lifetime Mortgages offer potential benefits for homeowners. However, it is crucial to analyse individual circumstances carefully. Consulting with a qualified financial advisor can help ensure that the best possible option is chosen.
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The information provided in this article is not intended to constitute professional advice. You should seek comprehensive legal, accounting, or financial advice based on your specific circumstances from a qualified solicitor, accountant, or financial advisor/mortgage broker before taking any action.
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