What is a lifetime mortgage?
A lifetime mortgage is a loan secured on your home that you do not have to repay until you die or move into long-term care. You keep full ownership of the property the whole way through. Interest is charged on the loan and, in most cases, rolls up: it is added to the balance each year instead of being paid monthly.
Lifetime mortgages are the most common form of equity release, making up over 99% of all plans sold. You can take one from age 55, and it can pay out as a lump sum, as a series of drawdowns released over time, or as a mix of the two. Many newer plans also let you make voluntary interest payments so you can keep the debt from growing as fast.
What is a home reversion plan?
With a home reversion plan you sell part or all of your home to a reversion provider in return for a tax-free lump sum or regular payments. In exchange you get the right to live there rent-free for the rest of your life. When you die or move into care, the property is sold and the provider takes their share of the proceeds.
Home reversion plans are far less common than lifetime mortgages. You can take one from age 65, and you usually receive between 20% and 60% of the market value of the share you sell. The reason you get less than full value is that the provider cannot cash in their investment until you leave the property, which could be many years away.
Key differences between the two
With a lifetime mortgage you keep 100% ownership of your home, and the debt grows over time as the interest compounds. With a home reversion you sell a share, so your ownership drops, but nothing accumulates in interest because it is a sale rather than a loan.
Lifetime mortgages start at 55, whereas home reversion usually asks you to be 65 or older. A lifetime mortgage gives you more room to manoeuvre, with features such as drawdown facilities and voluntary payments. A home reversion is simpler in how it is put together, but there are fewer providers to choose from.
The long-term effect on your estate is quite different too. With a lifetime mortgage, the compounding interest can eat well into what your beneficiaries inherit, though you still gain from any house price growth across the full value of the property. With a home reversion, you only gain from price growth on the share you kept.
Which type suits your circumstances?
A lifetime mortgage suits most people better, mainly because there are more products to pick from, more flexibility, and you hold on to full ownership. It works particularly well if you want to draw your money in stages through a drawdown facility, or you want the option of making interest payments.
A home reversion plan can be worth a look if you are older and want to release a bigger slice of your home’s value, if the idea of a growing debt makes you uneasy, or if you like the certainty that no interest will pile up. That said, the small number of providers and the below-market payments mean it does not suit everyone.
Get personalised equity release advice
Which one is right comes down to your age, what your home is worth, how much you want to release, and what matters most to you about your estate. Our qualified equity release advisers compare both options and recommend the plan that fits your situation best.
Contact us for a free, no-obligation chat about your equity release options.