Equity Release Schemes
Home Reversion Plans
You sell your home, or a share of your home, to a reversion company for a lump sum, but you retain the right to live there,
either rent-free or for a nominal rent
When your home is eventually sold the reversion company is recompensed
If you sell 100% (full reversion) of your home to the reversion company it gets 100% of the proceeds of the subsequent
sale prices, including any growth in value
If you sell 50% (partial reversion) of your home to the reversion company, it gets half of the proceeds, including any
growth
The reversion company will only pay you a percentage of the current market value for any share of your home that it buys
because it may have to wait years for a return
The percentage of the value of your home that the reversion company will pay is typically between 30% and 60% of its current
value, dependent upon your (and any partner's) age, sex and health
Full Reversion Plans
Full reversion means that you sell your entire home to a reversion company.
Advantages
No monthly repayments
Family's share of the home is determined from the beginning
Plan provides a cash lump sum and/or partial payments
The payment is larger if the applicant suffers impaired health
House value is removed from the estate for Inheritance Tax purposes
If the applicant dies shortly after completing the sale, the family may receive a rebate
Disadvantages
The home is bought at a discount so may be less suitable for people in their 60's
If death occurs soon after taking out a plan, it could be poor value for money
Reversion companies may not buy 'unusual properties' and/or in certain locations
The decision cannot be overturned once the home is sold
Partial Reversion Plans
Partial reversion means that you sell part of your home to a reversion scheme provider. You may later be
able to sell another portion of the home to raise further funds if required.
Advantages
No monthly repayments
You share in any rise in the property's value
A further percentage of the home can be sold to release additional funds
The payment is larger if the applicant suffers impaired health
Part of the property value is removed from the applicant's estate for Inheritance Tax purposes
If the applicant dies shortly after completing the sale, the family may receive a rebate
Disadvantages
The home is bought at a discount, so may be less suitable for older people in better health
If death occurs soon after taking out a plan, it could be poor value for money
Reversion companies may not buy 'unusual properties' and/or in certain locations
Interest-Only Mortgages
A mortgage is raised against the home; the borrowed capital is eventually repaid from the sale of the property,
rather than from an endowment or other independent savings scheme.
You borrow a lump sum secured against the value of your home
You pay interest each month
You can spend the money as you see fit
The capital is eventually repaid from the sale proceeds
Advantages
Amount owed is fixed so you keep any increase in home value
Borrowing at a fixed rate gives certainty to monthly payments
Disadvantages
You must meet monthly interest payments
Part of the loan may be needed to fund the interest payments
Variable rates may present a risk if interest rates rise
Home Income Plans
These plans provide a regular income instead of a capital lump sum, and do not need to be repaid until the
home is sold.
You take out a mortgage against your home
The money is used to buy an annuity which guarantees an income for life
Mortgage repayments are deducted from the monthly income, the remainder is yours
The mortgage is repaid from the eventual sale of the home
Advantages
Regular income for life
Interest deducted automatically
Amount owed is fixed
You keep any increase in home value
You may possibly purchase a competitive annuity elsewhere
Disadvantages
Not suitable for those looking for a large lump sum
Inflation erodes fixed income
Built-in annuities may not be competitive
Low annuity rates mean plans only suitable for older home owners
Roll-Up Mortgages
These are currently the commonest type of care-financing plan, comprising about 60% of the equity release
market for older people.
The lender gives you a lump sum, a monthly income or both
You contribute nothing - the interest is 'rolled up' into the loan
The amount borrowed plus the interest is repaid from the eventual sale of the home
How much you can borrow depends on your age and the property's value
The older you are, the more you can borrow
You are unlikely to be advanced more than 50% of your home's value
Advantages
No interest payments
Higher pro-rata income compared with interest-only mortgages or home income plans
Normally a lower-risk fixed-interest loan
Lessens Inheritance Tax for estates over the IHT threshold
Plans available for people aged 55 and over
Disadvantages
Uncertainty about how much will have to eventually be repaid
Uncertainty about how much equity will be left for your inheritors
Interest payments can mount up quickly, reducing inheritance
Interest rates may be high
Top-up loans may not be available
Shared Appreciation Mortgages
These plans are not now widely available but have been popular in the past and may be again in the future.
You borrow a lump sum based on the value of your home
No repayments until you die or the home is sold
After which the amount you originally borrowed is repaid plus an agreed percentage of the amount by which the home has
increased in value
Advantages
No regular repayments
The loan may cost nothing if the home's value has not changed
Disadvantages
If house prices rise strongly, the effective cost of the loan could be very high, and
You may be effectively 'locked' into the property
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