Home Reversion Plan v Lifetime Mortgage
- Penn Financial
- Apr 16
- 2 min read
Home Reversion Plans
...allow homeowners to sell a portion, or all, of their home in return for a cash lump sum and a Lifetime Tenancy in the property. The client then no longer owns that portion of the property. The catch is that typically, the plans are only available to homeowners over the age of 70, and the price that they sell the property to the provider (lender) will be noticeably below the market value; however, for homeowners in certain circumstances, they can be an attractive option.
Lifetime Mortgages
...on the other hand, which make up the vast majority of Equity Release business in the UK, offer cash lump sums based on the client’s age and the value of the property. The catch is that the loan interest is compounded, and that can increase considerably over the years.
Typical Amounts
Typically, with a Home Reversion Plan, the homeowner is selling their interest in the property, and so the loan-to-value can be 75% or even more. However, with a Lifetime Mortgage, given that the borrower is rolling up the interest, the amount of cash available at outset is limited, with a typical maximum often being just over 50%.
An Example
An example might be a person aged 75 with a property valued at say, £400K with a mortgage of say, £280K. The mortgage has now reached the end of its term, and the provider is requesting repayment in full. The client has no resources to repay the loan, so is looking for alternatives.
The current loan is 70% of the value of the property – too high for a Lifetime Mortgage. The borrower could move and realise a sum of £120K. But after costs of sale etc that sum would be even smaller and the chances of finding another property to buy may be a serious challenge. Using that money to pay rent would be a short term solution, and it would eventually run out.
If the borrower took out a Home Reversion, so let's say the borrower sells his property to the provider at 75% of the market value, he would clear the existing mortgage and have £20K in his bank as a "nest egg". He would no longer have to pay a monthly mortgage, so his disposable income would increase. He would no longer own the house, but he would be secure as a tenant for the rest of his life and, arguably, would enjoy a better quality of life as he would no longer have a large monthly financial commitment.
These plans are complex and need to be carefully considered. They require expert advice. In order to give the widest, holistic advice, they should be discussed with every client over the age of 70 as a possible option.
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The information provided in this article is not intended to constitute professional advice and you should take full and comprehensive legal, accountancy or financial advice as appropriate on your individual circumstances by a fully qualified Solicitor, Accountant or Financial Advisor/Mortgage Broker before you embark on any course of action.
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