EquityOct 27 2016

Home reversion or lifetime mortgage?

Supported by
Aviva
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Supported by
Aviva
Home reversion or lifetime mortgage?

When it comes to recommending the most appropriate equity release product there are two choices your client needs to make.

Do they want to continue to own their home - in which case, they could consider a lifetime mortgage, or do they want to sell their home and live in it rent free - in which case, they could consider a home reversion plan?

While the second choice might seem less appealing for some clients it may be the more appropriate option.

But lifetime mortgages remain by far the most popular equity release product, and accounted for over 99 per cent of lending.

According to the Equity Release Council, home reversion plans accounted for less than 0.5 per cent of the market during the first half of 2016.

Home reversion effectively allows you to access some of the value of your property while retaining the right to remain in it rent free. Dean Mirfin

Roger Marsden, managing director of Aviva Equity Release, says both types of equity release had evolved to alleviate the barriers that have previously prevented people from considering it.

He comments: “There had been a perception that equity release is expensive, but currently products are available with interest rates well below 4 per cent guaranteed for life.

"Similarly, people may have been worried in the past that opting for equity release meant forgoing any inheritance, but there is an available option of inheritance guarantees.”

Lifetime mortgages

Lifetime mortgages are available from age 55 onwards and are a form of equity release which allows people to free up money from their home without having to make monthly repayments. 

A lifetime mortgage is a life-long loan secured on the customer’s main residence and it is calculated as a percentage of the value of their property.

Compound interest is charged on the loan over the customer’s lifetime and repaid by the sale of the property when the customer dies or moves into long term care. 

Aviva, which only sells lifetime mortgages, said the difference between standard mortgages and lifetime mortgages were:

  • The guaranteed right to tenure without obligation to keep up repayments 
  • Protection for the customer against negative equity, with the provider absorbing the risk of the balance owed exceeding the value of the home.

Joanna Fowler, head of product at Saga Money, says all lifetime mortgages have to feature a ‘no negative equity guarantee’.

This means the customer, or their estate, will never have to pay back more than they receive from the eventual sale of their home – provided it is sold for the best price reasonably obtainable.  

Andy Wilson, director of Andy Wilson Financial Services in Lincoln, adds that an optional inheritance guarantee can allow the customer to protect a percentage of their home’s value to be returned to their estate for distribution to their beneficiaries.

Lump sum or drawdown

A customer taking out a lifetime mortgage is given the option of either drawing out a lump sum or regular smaller sums from the value of their home, while remaining in their property.

Nigel Waterson, chairman of the Equity Release Council says drawdown versions of lifetime mortgages had accounted for at least 65 per cent of new plans since 2011. 

He points out that, in the first half of 2016, a total of 7,917 drawdown plans were agreed: the largest number in any first-half period on record.

According to Aviva's Mr Marsden, lump sum products typically involved a larger withdrawal up front, which might be used for bigger expenditures such as clearing debts or making significant home improvements.

He adds: “Drawdown allows people to access an initial loan and set up a reserve facility so they can draw on their remaining housing wealth in instalments. It can give them an additional source of income as well as help with meeting one-off costs."

Ms Fowler adds: “The benefit of this type of plan is that you will only be charged interest on the amount that has been drawn, not the available facility that is yet to be drawn upon.”

Lifetime mortgages are increasingly allowing clients, or either family, to pay off part of the interest as they go along rather than letting it simply roll up. 

This allows the loan to be repaid in full without the requirement to pay an early repayment charge. 

However this will need to be done in conjunction with moving to another property, providing the loan has been running for at least five years.

Other options including paying off parts of the loan. According to the ERC, more than 50 per cent  of new plans allowed customers to make voluntary repayments up to a certain value - typically 10 per cent a year - without an early repayment charge. 

This option helps customers limit the total amount owed over the lifetime of the loan, as does the option with some products to make regular interest payments without risking default and repossession because customers can revert to roll-up interest at any point.

Home reversion plans

Unlike a lifetime mortgage, a home reversion plan involves giving up full or part ownership of the property the client is wishing to borrow on.

A home reversion plan involves a financial services provider buying all or part of the home at a discount to its true market value, in return for a cash lump sum or regular income payments. 

The homeowner retains the right to continue to live in the house until they move out – say into residential care – or die. 

Sales of these plans currently account for less than 1 per cent of the market. 

According to Key Retirement's technical director Dean Mirfin: “Home reversion effectively allows you to access some of the value of your property while retaining the right to remain in it rent free.

"The deciding factor though may be the fact people usually only get between 20 per cent and 60 cent of the market value of their house depending on their age and state of health.”

“The pros of this plan is  you will know precisely what portion of your property you have parted with and, if only sold in part, will know what proportion can be left as an inheritance. 

“This plan also ends when you die or move permanently into long term care. At this time the property is sold and the sale proceeds are shared according to the remaining proportions of ownership.”

Andrea Rozario, chief corporate officer at equity release specialist Bower Retirement explains that a home reversion plan still allows a client to benefit from rising property values.

She said: “The reversion plan company share in any increase in your property’s value, providing you have not exchanged 100 per cent of its value.”