Most people are afraid of losing their home ownership with a lifetime mortgage. The truth is that there is nothing to be afraid of. However, there are many factors to consider when deciding between a mortgage with lifetime parameters and a Home Reversion Scheme.
The Financial Services Authority (now the FCA or financial conduct authority) strictly governs both of the equity release scheme providers so you need to do your homework and choose the one you’re most comfortable with. In short, you retain full ownership of your property with a lifetime mortgage until either you or your spouse (or partner) dies the surviving partner keeps living in the house, or you move into long term care. The loan is repaid from the proceeds of the sale of the property and the balance, should there be one, will be paid into your estate in accordance with the wishes of your Will.
Minimum Borrow Amounts for Equity Release
Minimum loans vary between providers. For example the minimum release from the Hodge Lifetime Loan Option, Just Retirement, and Stonehaven are all £10,000. Most others equity release companies have set their minimum loan amounts between £15,000 to £26,000. You cannot usually borrow more than 55% of the value of your property and the older you are, the higher the loan percentage (the age of the older borrower is taken into account). Age therefore plays an important role when it comes to lifetime loans.
With a Home Reversion Scheme, you can also opt for varying loan amounts but in essence you “sell” your home to the Home Reversion Scheme provider for the percentage of the loan. The law protects homeowners under this scheme by ensuring that the Home Reversion Scheme provider cannot sell your home while you’re still living there, and can only do so once the longest living partner moves out or passes away. Additionally, a home reversion customer will receive a lifetime tenancy arrangement whereby they have the right to remain living in the property for the rest of their life. In contrast, a Lifetime loan ensures that you retain full ownership of your home and the difficulty is to choose the correct mortgage provider for your needs.
Differences of Home Reversion and Lifetime Loan
All Lifetime Loan providers offer a fixed interest rate for the life of the loan and others will work out a varying interest rate. In contrast a home reversion company incurs NO interest element as there are the guarantees about how much you have sold from the outset.
• Lifetime loans can begin as early as 55 years of age; home reversion schemes begin at 65.
• Lifetime loans carry fixed interest or variable interest rates; home reversion has no interest.
• Both schemes require the sale of your home; however, under home reversion a part of the home is sold immediately in order to access funds.
• Mortgages offer a higher potential to pay off the lender amount without selling the home; whereas home reversion would require a buyback of the part of the home sold.
When assessing the differences between home reversion and retirement equity release it is imperative to consider the eventual outcome your family will face. It is also important to consider inheritance as a separate benefit or disadvantage to the differences listed above.
There are specific lenders willing to offer an inheritance guarantee that would protect a certain amount of the home as inheritance for your beneficiaries. Without this clause in the lifetime loan agreement the home can be sold to cover the full loan amount and interest. It is also possible to put in a no negative equity clause in which the loan plus interest cannot increase beyond the value of the home at time of sale. In other words, the full sale amount could go to the lender, but no additional funds are necessary to pay a remaining balance no matter the devaluation of the home plus interest accrual that happens.
If you consider these two factors then you have one option of guaranteeing a small amount of inheritance with the right company and lifetime loan. Without the guarantee the loan under any compounding interest agreement could wipe out inheritance. Interest only lifetime loans in which an interest payment is made monthly is the only other way to guarantee inheritance.
Home reversion guarantees it based on the amount of home you retain ownership in.
As with any lender, they are in the business of making profit, so you need to think carefully about the various options available and always ensure you seek independent lifetime mortgage advice.
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