Equity release awareness is growing as more and more people reach retirement age in an asset-rich but cash-poor situation.
However, there is still a great deal of confusion about the different products available and the terms used. For example, we know that some people believe that the equity release is where you sell and rent your home, but in fact, the two are entirely different.
So let’s clarify the situation by taking a closer look at some of the phrases and products that you’re likely to encounter.
What Is Equity Release?
Equity Release is a term used to describe products that allow property owners over the age of 55 to have access to their equity without having to move out of their property. ”Equity’ is the value of your residence, minus any mortgage or loan that is secured against it.
Two different types of equity release products are available on the market – a lifetime mortgage and a home reversal plan. The Financial Conduct Authority must authorise all firms offering those equity release products, and consumers must first receive expert advice from specially qualified consultants. You can’t buy these products directly from the sellers.
What’s A Lifetime Mortgage?
Lifetime mortgages are loans that are secured against your home, just like a normal mortgage. It means that you can free up some of the equities in your home, but you can still live there.
You can also choose to receive your equity in a lump sum or as regular payments into your bank account.
You’ll retain full ownership of your property, and the loan will not have to be repaid until it is sold after you die or go to long-term care.
Interest on the mortgage will either be added to the loan through your lifetime, known as interest roll-up, or you can choose to pay back varying amounts or the total amount of interest each month.
When you release equity, you will reduce the value of your property, but there are plans available to protect the amount your family has to inherit.
You must be over 55 and the owner of the home to qualify for a lifetime mortgage. If you have a joint plan with your partner, the age of the youngest borrower must be at least 55 years.
What Are Home Reversion Plans?
Home reversion plans are where you sell off all or just a part of your home to a third party individual or company in return for a cash lump sum, regular monthly income payments or a combination of both.
You’ll be able to stay in your property for as long as you like under a lifetime lease agreement. There will be no interest and no monthly repayments due to the there being no loan.
You must be 60+ years old for a home reversion plan.
Home reversion is far less popular than life mortgages.
If you want to receive a lump sum, want to live in the house, and don’t have anyone to inherit the full value of the property, a home reversion plan might be suitable for you.
Why is there confusion?
A lot of people believe that the equity release is where you sell your home and then rent it back. In fact, such schemes do not constitute a release of equity at all.
In most cases, the sale-and-rent back (SRB) company will not guarantee a lifetime of occupancy. Instead, you pay full rental price for a fixed period of time, which must be at least five years. After that, your tenancy isn’t secure, and you could face a rent increase.
The FCA does regulate SRB but has identified serious problems with a number of firms in the past. Always seek financial and legal advice when considering one of these schemes.
The term “lifetime lease” is also used by various companies that offer home-for-life arrangements to people who want to move home.
Under these proposals, you pay a reduced rate to live in a property for your life without mortgage or rent payments.
It might seem like an attractive option if you want to move to a different property later on in life. Many people use the money from the sale of their old home to buy their “dream” retirement home.
But under these schemes, you don’t own, or even partially own, a new home. You’re just paying for the right to live there for your lifetime. The company retains full ownership and recovers the property when you die or go to long-term care.
The FCA does not regulate these schemes.
Cases have been reported in the national press involving people who feel they have been mis-sold or ill-advised in respect of these types of life leases.
Why Is Equity Release Different?
The key differences between the release of equity and the sell-and-rent-back are as follows:
Security of tenure. Equity release generally gives you the right to live a lifetime in your own home. SRB only guarantees a fixed-term lease.
Ownership. With an equity release, you either retain complete ownership of your home under a lifetime mortgage or retain part of it under a home reversion plan. SRB sees that your property is sold in its entirety.
Payment of rent. With the release of equity, you don’t have to pay rent. Under SRB schemes, you pay market-rate rent to live in the home.
The main distinction between a life lease under a home reversion plan and a life lease under a house-for-life scheme is:
Regulation. Release of equity through a home reversion plan is regulated by the FCA, and you must be advised before proceeding. Home-to-life schemes are not regulated.
If this post was helpful or if you’d like us to add more information about the differences between lifetime mortgages and lifetimes leases, then drop us a comment below or get in touch. We have other posts about lifelong leases on our blog that you may find interesting, take a look here.