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Your quick guide to home reversion, lifetime mortgages and drawdown

by: Newlife and LV=
  • 14/12/2011
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Your quick guide to home reversion, lifetime mortgages and drawdown
If you are not sure what the different equity release plans offer your clients, here is a quick cut-out-and-keep guide highlighting the pros and cons of home reversion, lifetime mortgages and drawdown.

Newlife offers its insight into where home reversion works, while LV= gives the run down on lifetime mortgages (pg.2) and drawdown (pg.3).

HOME REVERSION

Pros Cons

Customers receive a lifetime lease until such time as the last person on the original contract moves out or sells the property (although HR plans can be portable). Customers are protected by FSA regulation, SHIP rules and UK law.

 

HR involves selling legal ownership and transferring some or all of the equity in a property to a reversion provider in return for a cash sum. This sum is discounted against the market value because the provider might have to wait 30+ years before it receives its money.

 The credit history of the customer is not a factor as the provider is buying all or a percentage of the property for a discounted value based on life expectancy. This means there are no monthly repayments to make.

 

 It may impact on the amount of income tax customers are liable for. The original monies are paid out tax-free, but if the customer uses them to generate further income then tax might have to be paid.

 Customers can release an amount (tax-free) either as a lump sum or regular sum. As it is not a mortgage or a loan, it is usually possible to release a larger amount from a home than typically available with a lifetime mortgage.

 

 Home reversion can impact on means tested benefits or the amount of state support people are eligible to receive. People need to look at what the impact would be before making a decision.

 HR plans provide certainty that clients will be able to leave an inheritance as the proportion of the home not sold is left to the estate. If the property increases in value, the estate will benefit from the percentage of the property not sold and conversely whatever percentage is sold is taken out of any subsequent calculations for IHT liability of the beneficiaries (if spent.)

 

 Providers will only agree a deal on properties in good condition and that will be easy to sell on in the future. People become ‘tenants’ in their own home, but they are still liable for the general upkeep of the property. If this is not done to a satisfactory standard, the home reversion company can carry out the work itself and send an invoice to the tenant.

 The older you are the more you can release. It is possible to utilise up to 100% of the property with a HR plan and the exact amount actually released from the portion utilised is dependent on age and property value.

 

 The minimum qualifying age for a home reversion plan is typically higher than for a lifetime mortgage. Younger clients may find a lifetime mortgage is more suitable.

 

LIFETIME MORTGAGES

Pros

Cons

Lifetime mortgages allow people over 55 who want to release capital from their property without having to downsize to a smaller property.

 

Lifetime mortgages are not suitable for people under 55 with equity in their homes. 

With a lifetime mortgage, as you still own the property, you can still benefit from increases in the property’s value even if you have maximised the amount you can borrow.

 

 The cost of setting up a plan makes it an expensive option for people who only need to raise a few thousand pounds.

With a lifetime mortgage, the interest rate customers are offered could be lower as they do not require a drawdown facility.

 

 Whilst lifetime mortgages can be portable, the type of property you can move to may be restricted by your lender, so it is worth checking what the lender’s policy is up front.

 As a lifetime mortgage is portable customers are not prohibited from moving in the future. Provided the new property meets its lending criteria, a mortgage provider will conduct a valuation of the new home and adjust the loan and interest according to the price difference.

 

 A lifetime mortgage could potentially wipe out the equity in the property, so it is not suitable for people who want to guarantee an inheritance for their loved ones.*
 Customers retains ownership of the property and, if they enter long-term care or die soon after the mortgage has been granted, there will still be substantial equity left in the property.

 A lump sum lifetime mortgage can provide customers with a large amount of capital. However, customers who receive means tested benefits may find that equity release leaves them no better off.

 

 

DRAWDOWN

 Pros Cons

Drawdown products allow customers over 55 to release capital from their property without having to downsize to a smaller property.

 

Drawdown products are not suitable for people under 55 with equity in their homes.

Gives customers the opportunity to make periodic withdrawals making it suitable for those who are using equity release to boost their retirement income.

 

The cost of setting up a plan makes it expensive for people who only need to raise a few thousand pounds.

Customers are able to have their houses revalued after receiving the initial loan so, if property prices increase, they could potentially release more equity further down the line.

 

The roll-up interest charged on drawdown products means that it should not be taken out by people who want to raise capital for investing.

Suitable for people who receive means tested benefits as the initial loan can set to avoid any impact on benefits.

 

Drawdown could potentially wipe out all the equity in the property, so it is not suitable for people who want to guarantee an inheritance for their loved ones.*

 

Customers can release or borrow only what they need so they are not accruing interest/sacrificing equity for money that then just sits in the bank earning little or no interest.

 

Customers may not be able to access as much cash as they had planned further down the line.

 *SHIP members’ products have a no negative equity guarantee meaning the homeowner or their estate will never owe more than the property value. Some providers offer a solution to this called Protected Equity.

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