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How does a Lifetime Mortgage Scheme and a Home Reversion differ?

As people live for longer, planning carefully for retirement becomes more and more important. Living costs are on the rise, and there are a growing number of people who own valuable property but are strapped for cash during old age. This is why equity release schemes have become a popular concept. Because it allows people to free up the equity tied up in their homes, without the need to sell the property or move.

Equity release schemes have come a long way since they were first introduced to the market. Rising demand for equity release solutions resulted in increased competition among providers, and today, the equity release market is much more favourable for customers. Equity release plans available today are much more flexible, and interest rates are also generally lower than a few years back.

The two main types of equity release are lifetime mortgage deals and home reversion schemes. Both types of equity release allow customers to free up some of the equity built up in their home and use it as cash. The amount can be taken as a lump sum or in the form of monthly installments. Most equity release schemes need to be repaid only when the owner has died or moved into care, which is when the property can be sold.

A lifetime mortgage is a loan that is taken out on the property. In this case, the applicant retains full ownership of the house. The loan along with the accumulated interest is repaid once the property is sold. Interest that is incurred on the amount is added to the principle amount, so that effectively, interest is charged on the previous interest. This is known as compound interest. One of the most common concerns with compound interest is that the debt can quickly grow very large.

There are some new lifetime mortgages known as interest only mortgages, which do not incur any compound interest. Instead, interest is paid monthly, and in the end the amount to be repaid remains exactly the same as the original amount that was borrowed. Interest only lifetime mortgages may have higher interest rates in order to be financially viable for the lender.

Home reversion plans involve selling a certain portion of the property to the lender. The ownership is transferred into the lender’s name, and the customer retains some portion of the ownership. When the house is sold, the lender retains the same proportion of the sale value. Both home reversion and lifetime mortgage equity release schemes have their own pros and cons. If you’re considering equity release as an option, consult a financial advisor for objective and professional guidance.

Can anyone else live in the property if I take out Equity Release?

Equity release schemes are essentially loans that one can take out against the value of their property. This loan plus the interest that has accrued on it over the years is repaid once the owner has died or moved into long term care, and the house is sold at market value. In a time when living costs are on the rise, home owners are turning towards equity release as an option for financial planning during retirement.

There are two main types of equity release plans, the lifetime mortgage plan and the home reversion plan. Lifetime mortgage is exactly that – it is a loan that is designed to last the entire life of the applicant, and is repaid along with the interest when the house is sold. The applicant legally owns the house and can live in it as long as they live or move into long term care. In case of joint applicants, the house cannot be sold until both the applicants have died or moved into care.

In home reversion plans, a part of the house is sold to the lender. Once the house is sold, proportional share of the sale value of the house is repaid to the provider. Home reversion is not a loan against the house, but a notional selling of part of the house. Both equity release plans accrue compound interest on the loans.

One of the main advantages of an equity release scheme is that you can continue to live in your own home. Of course, that it generates an additional income is also an important advantage, but this could also be achieved by downsizing. Applicants can live in their home for as long as they live. Many people also use equity release loans to pay for home care, so that they can go on living in their own home.

Once the applicants have moved out or died, the equity release scheme ends and the house must be sold. The applicant’s family cannot continue to live in the house after this, unless the full amount of the loan plus interest can be repaid immediately by some other means. In case of home reversion plans, the loan amount increases in proportion to the market value of the house when it is sold.

Sometimes it may be necessary to add another applicant to an existing equity release plan. In cases where joint applicants get divorced, it may also be necessary to remove an applicant from a plan. It is possible to do this, in theory, but is subject to the lender’s terms and conditions for that particular loan. It is therefore important to seek specialist advice and guidance before taking any step related to equity release.