Many of the so-called baby boomers of the 1960s are sitting on huge levels of equity in their homes. As the cost of living continues to rise, there is a growing trend towards making your property work in retirement. The two main options for those over 55 are lifetime mortgages and home reversion schemes. So, what do these two fundraising options have to offer for those approaching retirement?
Home reversion schemes
One of the main problems for those approaching retirement, looking to release equity from their home, is a change in their financial situation. Many of them will have seen a reduction in the regular monthly income. As a consequence, they may have problems passing the traditional mortgage affordability test. However, help is at hand!
No monthly payments
The whole idea behind a home reversion scheme is the ability to sell part of your property to a third party. As there are no monthly payments, there is no need to undertake a mortgage affordability test. There are a number of factors to consider which include:-
• Price paid
Home reversion companies tend to pay between 20% and 50% of the market value of their share in a home. This means that for example if they bought 50% of a property valued at £100,000, which would be worth £50,000 on the open market, they would only pay between £10,000 and £25,000.
• Free accommodation
As part of a home reversion scheme, the original homeowner will live in the property, rent free, until they either pass away or move into full-time care. While the significant discount on market value is a blow, free accommodation for the rest of your life does have a value.
• Selling your property
In the above scenario, the home reversion company would receive 50% of net proceeds when your property is sold. The balance would be returned to the original homeowner/their executors. The home reversion company has no influence over when the property is sold, as this is specified in the contract. So, in theory the home reversion company could have their capital tied up for anywhere up to 40 years plus.
Lifetime mortgages are a little more complicated than the home reversion schemes, although they are proving very popular. Some of the main factors to consider include:-
• No monthly repayments
The workings of a lifetime mortgage are simple. A part of the property is remortgaged, for example 50%, but there are no monthly repayments. Instead, the traditional monthly interest payments are simply rolled up and paid off, with the capital, when the property is eventually sold. It is worth noting; as the interest is rolled up you will effectively be paying interest on interest.
• Capital and interest repaid on sale
As with a home reversion scheme, there is no set timescale for the sale of the property. It will occur when either the homeowner passes away or they move into full-time care. At this stage, the property will be sold; mortgage capital and (rolled-up) interest repaid and the balance returned to the homeowner/their executors.
• Lifetime accommodation
Lifetime accommodation in this situation is of no additional value because this is simply a type of remortgage. However, as we touched on above, the mortgage repayment term is open-ended so again could be anywhere up to 40 years plus.
It is very important to take financial advice when looking at a lifetime mortgage, or a home reversion scheme. There are a number of pros and cons which need to be taken into consideration, such as future inheritance. More and more people are now looking at these options, as a means of raising capital to fund their lifestyle in retirement. There is also the option of raising capital in this manner and using it to pay down high interest debts.