Understanding Lifetime Mortgages and Home Reversion Plans

Here, we take a look at equity release and, in particular, lifetime mortgages and home reversion plans. This article is particularly relevant to the CII R01, R07, CF6, R06, and AF5 exams.

This article is correct as at 11 June 2024.

Equity Release

Equity release refers to products that enable older clients (55-60 plus) to access the equity in their homes. There are two main equity release options:

• Lifetime mortgages; and
• Home reversion plans.

Lifetime Mortgages

A lifetime mortgage is where a mortgage is secured on the property, and interest can be either rolled up or repayments can be made.  There are several different products available including:

• Fixed repayment – where no interest is charged, but a higher amount of capital is repaid at the end of the term than was released to the client at outset.
• Interest-only – the client pays the monthly interest rather than having it accrue over time, and only the capital released to the client at outset needs to be repaid at the end of the term.
• Drawdown – the lender agrees the total amount of capital that can be released to the client. The client draws on this reserve as and when they need it, only paying interest on the amount drawn down. The amount drawn down (rather than the whole reserve) then needs to be repaid at the end of the term.

A lifetime mortgage typically ends on death or if the client needs to move into a long-term care facility. It is at this point that the capital and accrued interest (if any) is paid back from the proceeds of the sale of the property.

Depending on how much time elapses from outset, this can mean that the amount owed can increase quite rapidly over a period of time.  As a result, normally only up to 60% of the value of the property can be borrowed, but this will depend on the age of the borrower at outset.

To protect borrowers, most lifetime mortgages have a ‘no negative equity guarantee’. This means that when the property is sold, if the proceeds are not enough to pay the outstanding loan to the lender, neither the client (in the event of long-term care) or their estate (in the event of their death) would be liable to pay any more.

Home Reversion Plan

With a home reversion plan, the home, in full or in part, is sold to a home reversion provider in exchange for a lump sum or regular payments, plus the right to stay in the home for a nominal rent. Normally, between 20% and 60% of the market value will be offered, with bigger percentages given as age increases. Some providers will pay larger amounts where the seller pays market rent. 

Advice Considerations

To advise on equity release, financial advisers require a specialist qualification, e.g., the CII’s ER1: Equity Release. In addition, non-advised sales are not permitted, and the FCA expects all firms to view equity release customers as being potentially vulnerable.

These protections reflect the fact that equity release is a big decision that cannot be reversed (in the case of home reversion plans) or cannot easily be reversed (for lifetime mortgages).

Potential downsides include:

For lifetime mortgages – 

• interest rates are usually higher than those charged on ordinary mortgages
• the interest rate could be fixed or variable and therefore could become more or less attractive over time, depending on market movements
• early repayment charges may apply
• downsizing in the future may involve a repayment to the lender

Home reversion plans – 

• the emotional impact of no longer owning your home
• although the client no longer owns the property, they are still responsible for its maintenance (including costs)

In both cases – 

• the money released may reduce entitlement to State benefits
• there will be fees involved
• there will be less to pass on as an inheritance (although this could be viewed as a positive where an estate would otherwise have a large Inheritance Tax liability).

Factors to consider, therefore, include the client’s age, income and savings, the amount they want to release, and their plans for the future (including their views on leaving an inheritance).

Grab the resources you need!

If you’re studying for your CII R01 exam, and you’re wondering how you’ll ever manage to pass, grab our free taster to try out one of Brand Financial Training’s mock exam papers for yourself.  Click the link to download the R01 mock exam taster now!

Alternatively, you can download the taster for R07, CF6, R06, or AF5 if any of those exams are causing you to worry.