An equity release entails taking some cash out of the equity that you have in your home. There are two primary ways to do this: a home reversion plan or a life-time mortgage. An equity release comparison begins by looking at the key differences between the two.
The first part of the equity release comparison is in terms of interest calculations. A lifetime mortgage is charged with interest based on the percentage of the advance given against the home. This works in much the same way that any other loan does. With a home reversion plan, interest is null. This is because the lenders assume an equal share in the ownership of the property. Interest rates rise and fall. In a lifetime mortgage, generally speaking, the borrower pays interest at a fixed rate. Again, with a home reversion plan, there is no worry in this regard because there is no interest to begin with.
The second part of an equity release comparison is considered the protection that a borrower has against a falling property value. In a home reversion plan, the loaner/lender shares the risk of falling property value. With home mortgages, depending on the deal, there is protection against a falling property value. A lifetime mortgage will have limitations in terms of value in most instances due to economic changes. If the economy suffers property values are going to be lost.
It can put you into a situation of no equity, which means if you pulled out only a small payment and not the entirety of your equity you might be limited in taking any more. The good news is that you only pay interest on the money you have on loan. You have the option of selling the home to pay off the mortgage without worrying about negative equity; however, you would need to move out once you decide to sell under a lifetime mortgage.
As for inheritance, it is clear that a mortgage comes up on top, assuming that the homeowner is keen on leaving something behind for his loved ones. Overall, a mortgage equity release is just better in this regard. It means that the loved ones of the deceased have a property asset, and potentially cash-free tax depending on when the equity was released.
While it is an advantage, your beneficiaries are limited in the property asset. The mortgage and interest still need to be paid. The money from the sale can be tax free; however, if your beneficiaries do not want to sell it can present a difficulty as they would need to pay-off the mortgage with their own money or other money you left as an inheritance such as money from a life insurance policy.
The same cannot be said for a home reversion plan. This is because the lender owns the portion or entirety of the home from which the equity is released. If a portion of the home remains to be sold, it needs to be sold to the home reversion provider. It presents an inflexible situation.
The home reversion provider determines the amount paid out for the sale. The remaining property will be sold based on the home value; however, fair market price does not have to be offered. Generally, the home reversion provider will pay the costs for the sale which leaves a smaller inheritance behind than selling an entire home.
Different types of lifetime mortgages exist such as drawdown, enhanced, and interest-only. You may find during a comparison that one of these types of mortgages suits you better than a home reversion scheme. The decision is ultimately based on your current situation, your age, and what you feel you can leave behind for your beneficiaries given your current financial status.
When there are questions about either type of home equity release, lifetime mortgages or home reversion, there are agents and solicitors available to you. They can help you determine some of the legal details that can be a part of the agreement.
One last situation to discuss between the two options is the right to live in the home. This is the final stage of an equity release comparison because the lifetime mortgage means you still own the property. Home reversion puts you into a lifetime tenancy agreement. You can stay in the house until you decide to leave or die, but you only own a portion.
Of course, different banks will provide different rates and plans, but, ultimately, they will follow the same basic template. Both of these have value, but it is clear that a lifetime mortgage is the more altruistic of the two equity releases. This equity release comparison should help you to make an informed decision.