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Lifetime Mortgages and later life borrowing
Borrowing money against your home can be a helpful way to boost your income in retirement, without having to move house. We will explore the options and help you make an informed decision.
What is a home reversion plan mortgage?
A home reversion plan is a form of equity release, allowing you to access some of the value tied up in your home.
With a home reversion plan you sell all or part of your home to the plan provider, in exchange for a lump sum or a regular income for life. Most home reversion schemes are only accessible to those aged 65+.
How does it work?
When you approach a home reversion provider, they will make an offer to purchase a percentage of your property. The price they offer will be substantially below market value, often around 60% of what you would receive from selling privately.
If you accept their offer, you will receive either a tax-free lump sum, or regular income payments, or a mixture of both.
You then live rent free in your home until you die, you move into long term care, or you decide to sell your remaining share and move out. When the property is sold, the provider will receive their agreed share of the sale price. The rest is yours, or forms part of your estate.
An example:
Your home is worth £300,000 and a home reversion provider offers you £75,000 for 50% ownership. Over time, house prices in your area increase and after your death, the property sells for £400,000. The provider receives 50% of the sale price, which is £200,000. The remaining £200,000 becomes part of your estate.
What are the pros and cons of a home reversion plan?
As with any form of equity release, the benefit is the chance to release money from your property without moving home. The funds you receive are tax free, unlike pension income.
Selling part of your home can also help to reduce inheritance tax.
The most obvious disadvantage of home reversion is that you won’t receive the full market value for your property. You will be making the compromise to receive less money for the convenience of not moving house.
Taking a lump sum could affect the financial support you receive from the government. Choosing to receive a regular income can avoid this, but if you die sooner than you expect, you and your beneficiaries would get very poor value for money. Some plans do offer some protection against losses caused by premature death.
The other disadvantage that many people find uncomfortable is the idea that you are no longer the sole legal owner of your home.
Should I choose a Home Reversion Plan or a lifetime mortgage?
People who explore equity release plans tend to decide on a lifetime mortgage rather than a home reversion plan.
A lifetime mortgage allows you to keep full ownership of your home, which means you benefit from increases in the property’s value, provided house prices rise. With home reversion, you only benefit from price rises on the share of the home that you still own.
The main downside to a lifetime mortgage is that you pay interest on the loan. As this grows over time, you could end up owing much more than you borrowed. These days providers have to offer a ‘no-negative equity’ guarantee, so you will never owe more than the amount raised by the sale of your home.
Whether to choose a lifetime mortgage or a home reversion scheme will depend on a wide range of circumstances, including your tax status and how much you wish to leave your family as inheritance. It’s very important to seek financial advice on any aspect of releasing equity in your home.
How can I get a home reversion plan?
If you’re considering any form of equity release please make sure you seek detailed professional advice. Home reversion is a big decision that affects both you and your family, so it’s important to make sure you have considered all the implications.
We will take time to understand your financial and personal situation to give you tailored recommendations. We support you to make an informed decision and suggest you discuss the details with your family before making any commitment.
Mortgages by Mcateer Ltd is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Please note, this article is for information only purposes and we cannot provide advice on Home Reversion plans
A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action. If you are considering releasing equity from your home, you should consider all options available before equity release.
The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution. As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.
Although the final decision is yours, you are encouraged to discuss your plans with your family and beneficiaries, as a Lifetime Mortgage could have an impact on any potential inheritance. We would also encourage you to invite them to join any meetings with your Financial Adviser so they can ask questions and join in the decision, as we believe it is better to discuss your decision with them before you go ahead. This is a referral service.
Approved by The Openwork Partnership on 04/12/2023.
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