If you are considering equity release to unlock some of your property wealth, think carefully about the type of scheme you choose. A home reversion plan, for example, can be a good option for a select few, but they carry considerable risk that make them unsuitable for most people. Less than one per cent of all equity release plans sold in the second half of 2018 were home reversion plans, according to the Equity Release Council. Almost all equity release plans arranged in recent years have been lifetime mortgages.
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Home for life plan pros and cons
The amount of money you will receive if you choose a home reversion plan depends on your age and health. The older you are when you buy a plan, the closer to market value you’ll receive. In return, the provider gives you the right to continue living there rent-free for the rest of your life or until you move into long-term care.
Do I have to pay interest on a home reversion scheme?
There’s no interest to pay with a home reversion plan, as this type of scheme is not a loan. When your house is eventually sold, the provider will take their share of the proceeds. If, for example, you sell 50 per cent of your home to a home-reversion provider, they will take 50 per cent of the sale price. The remaining 50 per cent will go to your estate.
- You remain in your home
- The lump sum is tax-free
- You retain a share of the property to pass to beneficiaries
- :You will receive far less than the true market value
- It would be costly to cancel the plan early, or if you die within a short period
- You will no longer be the sole owner of your home
Lifetime mortgages have become the most popular type of equity-release scheme in recent years. This type of plan is essentially a loan, but, unlike a normal mortgage, you don’t have to make monthly repayments.
Instead, interest usually builds up over time, and this – along with the sum you borrowed – is paid out of the proceeds of your estate when you die or move into long-term care.
You can choose to release your equity as a lump sum or take a regular income over a period of time.
As long as you are dealing with a provider that belongs to the Equity Release Council, you’ll benefit from the no-negative-equity guarantee, meaning you will never owe more than the value of your home.
Home reversion plans versus lifetime mortgages
Home reversion plans are very different to lifetime mortgages. With the former, part or all of your home will belong to a company, although you retain the right to live there. With a lifetime mortgage, 100 per cent of your home belongs to you.
And although with a home-reversion plan you can stay in your home for as long as you live, you give up any right for you or your beneficiaries to benefit from future increases in the value of the share you have sold.
Take expert advice
Remember that all equity-release plans will reduce the value of your estate when you die, and they could affect your entitlement to means-tested state benefits.
It is very important to seek professional financial advice before proceeding with an equity-release plan. The Telegraph Equity Release service gives you access to qualified local advisers who specialise in equity release, as well as an online calculator that can help you decide if the numbers add up for you.
Find out how much equity you could release with The Telegraph’s free equity release calculator.
The Telegraph Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Only if your case completes will Responsible Life charge an advice fee, currently not exceeding £1,490.
The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.