Home reversion vs lifetime mortgage – what’s the difference? In this article we’ll explore the key differences and similarities between home reversion plans and lifetime mortgages, looking at:

  • How they work
  • Similarities
  • Differences
  • Drawbacks

What is a home reversion plan?

A home reversion plan allows older homeowners to access some of the equity tied up in the value of their home by selling a share of the property to a lender or a home reversion company.

What is a lifetime mortgage?

A lifetime mortgage enables older homeowners to borrow money secured against the value of their home with a loan that lasts their lifetime.

How does home reversion work?

With a home reversion plan you sell a share of your home to a lender to gain access to some of the money tied up in the value of your property. A home reversion plan is not a loan.

How does a lifetime mortgage work?

With a lifetime mortgage you retain ownership of your home and leverage the value of the property to borrow money. The loan will accrue interest over time which will increase the overall borrowing amount.

Home reversion vs lifetime mortgage

Similarities between home reversion plans and lifetime mortgages

Equity release – both home reversion and lifetime mortgages are types of equity release whereby homeowners can release some of the equity from their home without the need to downsize.

Age – for both home reversion plans and lifetime mortgages the minimum age requirement for the youngest applicant is 55 years old. Although, some providers have a higher age requirement for home reversion plans.

Living at home – both types of equity release allow homeowners to continue living in their homes for the rest of their lives or until they move into long term care.

Repayments – with both options homeowners are not obliged or required to make any repayments.

No negative equity guarantee – when homeowners use equity release providers that are approved by the Equity Release Council, whether for a lifetime mortgage or a home reversion plan, they have peace of mind that they will never owe more than their property is worth at the end of the plan.  

Differences between home reversion plans and lifetime mortgages

Ownership – with a lifetime mortgage borrowers retain 100% ownership of their property, whereas with a home reversion plan you no longer own the property in full because you have sold a share to the lender.

Repayment and managing cost – with a lifetime mortgage homeowners have the flexibility to repay some of the interest, all of the interest or more than the interest. By making repayments a borrower can reduce the overall cost of the loan and retain as much equity as possible. However, with a home reversion plan there are no repayments to make because it’s not a loan. Therefore with home reversion homeowners do not have the same opportunities to maximise the amount of equity they’ll own at the end of the plan. 

Inheritance – homeowners who take out a lifetime mortgage have the flexibility and the option to maximise the amount of inheritance they leave to their beneficiaries by making repayments throughout the loan term. With a home reversion plan homeowners do not have the flexibility to increase the amount of equity left in the property to pass on to beneficiaries because they have already sold a percentage of their home.

Accessing the equity – lifetime mortgages offer more flexibility when accessing the equity in your home; you can take a lump sum, regular lump sums, monthly payments, or drawdown as much or as little as you need when you need it. As property values increase you can borrow more over time if you need to. Home reversion plans do not offer as much flexibility with how you access the funds.

Drawbacks of home reversion plans

Loss of equity and appreciation – because you have sold a percentage of your property value to a lender you can no longer benefit from any increase in value on the sold percentage of the property.

Property value – when the property is sold it may sell for less than market value because a share of the property has already been sold to a third party which can impact the perceived value.

Irreversible – the decision to sell a share of your home via a home reversion plan is irreversible. In most circumstances you cannot buy back the share that you sold.

Finances – selling a percentage of your estate can have a long term impact on your finances and affect the value of your estate.

Drawbacks of lifetime mortgages

Loss of equity – if you take out a lifetime mortgage and do not make any repayments the effect of compound interest over time will have a significant impact on the value of your estate once the capital plus interest has been repaid. You could end up owing a lot more than the amount you initially borrowed which will affect how much you can leave to your beneficiaries. 

At Personal Retirement Planning we are equity release specialists who advise homeowners on their options and make recommendations on which type of equity release plan is best suited to their individual needs.

If you’d like to speak to an adviser please call Barry Leigh on 0203 435 9561 or email barry@prpltd.co.uk