In the UK, there are two different types of equity release plan currently available to mortgage-free homeowners over the age of 55: home reversion plans and equity release mortgages, often known as lifetime mortgages.
With this type of plan, you sell a portion of your home in exchange for a cash lump sum. You do not borrow any money, and as a result there is no question of your having to pay any interest. However, releasing equity by means of a home reversion scheme means that you will no longer own 100% of your property. Instead, you become a co-owner, but according to the terms of the agreement, you will have the right to live in your home for the rest of your life.
When your home is sold – usually after you have passed away – the lender will take their percentage of the sale price. Consequently, the eventual cost of a home reversion plan depends entirely on the value of your property when it is sold, and is therefore very much at the mercy of the state of the housing market. So, if the property’s value has increased considerably in the intervening period between the time you entered the scheme and the time the house is sold, your estate stands to lose out on a lot of potential money. The older you are, the more the provider is willing to advance.
One thing that is very important to remember about home reversion plans is that the amount you are advanced, as represented by a percentage, is not the same as the percentage of your property’s value that you will be surrendering. So, you might get an advance of 20% of your property’s value, but you will in fact be giving the home reversion plan provider 70% of your home. Here is an example of what this might actually mean in terms of eventual costs:
If a 65 year old is given a 20% advance on a property worth £250,000 – so a £50,000 cash lump sum – the home reversion plan provider is likely to require a 70% portion of the value of the house in return. If twenty years later the homeowner passes away, and the property is sold for £350,000, the plan provider would receive £245,000 and the estate would receive £105,000.
If house prices were to rise much more dramatically than in the example given here, the potential loss of money will be considerably greater. At present, the three main providers of home reversion plans in the UK are New Life, Hodge Lifetime and Bridgewater.
This type of equity release scheme is more common in the UK than home reversion plans, and rather than selling a portion of the property in exchange for a lump sum, it involves borrowing money from a lender with the property being used as collateral. Interest is charged on the borrowing each year, and the mortgage is repaid when the home is sold – again, usually after you have passed away. For more detailed information about this type of equity release scheme, see Equity Release Mortgages.