Lifetime mortgages or home reversion plans

“Clients have to be aware these products and schemes can be more expensive than an ordinary mortgage”, says Christine Newell, mortgages technical director at Paradigm Mortgage services.

Lifetime mortgages

Lifetime mortgages are relatively straightforward and flexible, with loans based on the client’s age and the value of the property.

The client continues to own the home completely and retains the right to live in it.

However, although house prices have been on an upward trajectory for seven years, they may be starting to plateau, and lending may be starting to slow down.

Data from the Bank of England’s July Money and Credit report shows the number of approvals to the end of June reached 120,215, compared with 127,546 in January.

There are many different options available and it is important current and future needs are matched with the right type of equity release plan Equity Release Council guidelines

If this falls, the sale of the home might not raise enough to cover the debt.

Also, if the interest on the loan continues to grow and outpaces house price growth, the estate may be left with an bill to pay on the sale of the property.

Ms Newell comments: “The debt can increase where interest is rolled up”.

Clients will have to pay compound interest on the loan - meaning interest accrues each year not just on the loan itself but on the previous’ years interest. The longer the client has the loan, the more interest repayments the client will make.

To avoid the effects of this, Saga’s equity release advice service suggests avoiding mortgages which do not offer a ‘no negative equity guarantee’.

In its factsheet on equity release, the service states: “We only recommend lifetime mortgages that carry a ‘no negative equity guarantee’, meaning the repayment amount will not exceed the sale proceeds of the property.

“So even if property prices go down, the client or the estate will never owe more than the amount realised in the sale of the house, subject to meeting the mortgage conditions of keeping the property in good repair.”

Home reversion

An HRP, like a lifetime mortgage, allows the borrower to get all or part of the value of your property while retaining the right to remain in the property, rent free, for the rest of their life.

It allows the property owner to sell some or all the home to an authorised home reversion provider, and in return, the owner will get a tax-free lump sum or regular payments for life.

According to the Equity Release Council’s (ERC’s) guidelines: “There is no day-to-day interference and no restrictions on treating the house exactly as before; as a private home to live in freely.”

HRP providers will allow the client to move to a new property, as long as the new one is acceptable as continuing security for the equity release loan.

At the end of the plan (when the client dies or goes into a permanent residential care home), the property is sold and the sale proceeds are shared according to the remaining proportions of ownership.

One advantage of an HRP is that the client knows exactly what they have spent or used, and what has been put aside for savings or inheritance purposes.

Another advantage is the ‘no negative equity’ guarantee.

Disadvantages are HRPs will not usually give clients anywhere near the market value of the home, compared with selling it on the market. Also, depending on which provider you use, the client could only get 20 per cent to 60 per cent of the market value of the home (or the part the client sells).

Another disadvantage is many HRP providers insist the client is at least 60 or 65 before they apply.

According to the ERC’s guidelines: “There are many different options available and it is important [the client’s] current and future needs are matched with the right type of equity release plan.”

Taking out either could affect a client’s tax position, their eligibility for means-tested benefits or their ability to move or sell the property, which is why the ERC stresses the importance of seeking independent advice from a qualified equity release adviser.

Enhanced products

For clients who lack robust health, an enhanced lifetime mortgage may be suitable, as depending on the plan, and various underwriting factors, this could allow more cash to be released from the property than a standard lifetime mortgage.

The loan will take into consideration factors such as a client’s health, age, lifestyle and even gender.

Such plans can start from age 55 and, depending on what the client needs, there are various options. For example, providers such as More2Life offer inheritance protection and a drawdown facility.

■ Inheritance Protection Option – protection for the client’s nearest and dearest, ring-fencing through an equity guarantee option a fixed percentage of the home’s value to be ring fenced for the benefit of any beneficiaries.

■ Drawdown Facility – If the client does not need the whole amount immediately, they can take smaller increments. This could mean the client pays less interest over the long-term as the balance starts lower, so the effects of compounding are less.