Home Reversion Plan Calculator – How It Can Help You
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Use a home reversion plan calculator to help you understand how much money you could release using a home reversion scheme, and how much it could end up costing you in the end.
We discuss the specifics about home reversion equity release before explaining everything you need to know about a home reversion calculator and where to find them.
What is equity release and who can use it?
Equity release is used by seniors who own their own home and want to access large amounts of credit. It is one method of releasing equity that can be further subdivided into two types of loans, namely a lifetime mortgage or home reversion plan. Both these loans do not require any monthly repayments – keep reading to uncover how equity release loans do eventually get repaid.
Because equity release is only used by people over the age of 55, it is often used as a way to fund retirement, retire earlier than otherwise possible or for similar reasons. You must be releasing equity from a main residence with no debts secured by your property, which means you will usually need to have paid off your residential mortgage in full as well.
So, if these loans secured by your main residence do not require monthly repayments, how do they get repaid? They are only repaid when the last person named on the equity release plan either dies or moves into long-term care.
At this stage, the loan must be repaid in full and is made possible because the lender can force the sale of the property to raise cash. From the sale proceeds, the equity release lender recovers the money owed and the remaining funds are given to the homeowner if still alive, otherwise added to their estate.
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Why do people consider equity release?
As mentioned, older homeowners usually consider equity release plans so they can improve their life during retirement, which could include general expenses, home improvements, holidays, private medical services and much more.
Some people use equity release as a way to give their loved ones an earlier (less valuable) inheritance to help buy a property or make investments. There can still be inheritance tax implications if money is given away within seven years of death.
How can you do equity release?
Equity release includes two types of loans called a home reversion scheme and lifetime mortgage. Both of these loans work in a similar way by not asking for monthly repayments and only recovering the debt after the homeowner dies or moves into care – using the property sale proceeds.
But the two loans have some significant differences as well. Whereas a lifetime mortgage will charge a compounded interest rate and add this amount to the total owed each month, a home reversion scheme does not charge any interest whatsoever. Below we explain how a home reversion scheme works in full with a simplified example.
What is a home reversion scheme?
A home reversion scheme is a type of equity release loan for senior homeowners. It usually provides the homeowner with a tax-free lump sum with no monthly repayments. This tax-free cash is not charged with any interest either, so how does the lender make a profit on the credit agreement?
The lender almost certainly guarantees to make money from the loan by getting the homeowner to agree to give them a percentage of their future home sale value.
For example, you might take out a loan worth 20% of your equity today but have to agree to give the lender 75% of your property’s sale value when you die or move into care. With most property prices increasing over time, this can make the overall cost of a home reversion scheme even more expensive, and some may say the cost is eye-watering.
Drawdown vs lump sum home reversion plan
Many home reversion plans allow the homeowner to choose between a tax-free lump sum or drawdown facility. If they choose to receive their money as a lump sum, then they receive all of their money at once.
However, if they choose a drawdown, they will receive an initial lump sum and be able to access the rest of their loan when and if needed. The rest of the loan is kept with the lender in a cash reserve.
Choosing a drawdown home reversion scheme is not as beneficial as choosing a drawdown lifetime mortgage where doing so can avoid interest. But there are still some benefits of using a drawdown home reversion scheme, such as:
- Budgeting – it could help you budget throughout retirement or large home improvement projects.
- Means-tested benefits – it could mitigate your personal wealth and maintain your eligibility to receive means-tested benefits as you currently do.
How much money could you release?
How much money you could release will depend on your age, property value, further details about your property and the equity release lender you use. In general, the most amount of money you could release with a lifetime mortgage and home reversion scheme is 60% or 80%, respectively.
This means in the best-case scenario, someone with a £200,000 home could access as much as £120,000 or £160,000 using a lifetime mortgage or home reversion scheme. Most people release much less than these amounts.
What is the minimum age for a home reversion plan?
Equity release loans are only available to people over 55 years old and this applies to home reversion schemes as well. However, some home reversion schemes may set higher age limits, sometimes as high as 65 years old.
Any age restriction applies to both homeowners on the application. So if one homeowner is too young to apply they will need to wait until both homeowners meet the age requirement. You cannot apply for equity release loans with more than two people.
Are home reversion plans regulated?
Home reversion lenders are regulated by the Financial Conduct Authority. You should only consider an equity release scheme that is offered by a legitimate lender that is authorities and regulated by the Financial Conduct Authority, otherwise, you are dealing with illegal companies.
Further regulation comes from the Equity Release Council. It is highly recommended to prioritise lenders that are members of this governing body. Find out why below.
What is the Equity Release Council?
The Equity Release Council is a group striving to improve standards and the reputation of the equity release sector. They do this by offering memberships to any company working in the industry, including equity release providers.
One way that the council aims to improve standards is through the group’s rules and guidelines. Every member must abide by these rules, which have predominantly been written to give senior homeowners greater protection, assurance and peace of mind. One of the most important rules they have made is the negative equity guarantee for people taking out lifetime mortgages.
Is a home reversion plan a good idea?
A home reversion plan can be a good idea for some people, and for others, there may be better alternatives.
People with children relying on receiving a significant inheritance will often find a home reversion scheme a more difficult decision. This is because the eventual cost to repay is high and this affects how much money is left in the homeowner’s estate.
You should get reputable financial advice to inform your decision.
How does a reversion company calculate its offer?
A home reversion company will tell you how much tax-free cash you could release using their loan. They calculate this figure primarily based on your age and property value. How much money you could release will usually rise in conjunction with your age, but each application is decided on individually.
You can usually get an idea of how much money you could release by using an equity release home reversion calculator.
What is a home reversion plan calculator?
An equity release calculator is an online tool that uses your information to project how much money you could release from your home and how much it could end up costing you to repay.
A lifetime mortgage equity release calculator uses interest rates because interest is applied to those loans, whereas a home reversion equity release calculator does not incorporate an interest rate because no interest is charged.
The user will simply add personal information such as their age, as well as their property value. This will be used to determine how much you might be able to release from your home, and illustrate what percentage of your property’s eventual sale proceeds the lender will demand in return.
Where can you find a home reversion plan calculator?
A home reversion equity release calculator can usually be found directly on home reversion lender websites. You may also find them on generic websites discussing and explaining how equity release works, including forums.
Another place you might spot them is on financial service websites, such as financial advice companies and brokers.
Should I trust a home reversion plan calculator?
An equity release calculator should be used as a guide only. The equity release calculator does not assess your personal situation in enough detail to give absolute certainties. The loan amount you are offered may be different to what is shown.
How does a lifetime mortgage work?
A lifetime mortgage works by charging interest on the amount of money you release. Neither the interest nor the capital loan amount gets repaid in instalments. It all gets repaid once the homeowner dies or moves into care through the sale proceeds of their property. By the time the homeowner needs to repay, the interest will have rolled up continually and made the total owed grow significantly. There are a number of variations of lifetime mortgages on the market.
Lifetime mortgage equity release calculator
A lifetime mortgage equity release calculator uses your estimated property value and age to project the amount of money you could release and how much your debt would grow over different time periods. The calculator uses your property value estimates and a representative interest rate, so it may not be entirely accurate.
Should I use a home reversion plan or lifetime mortgage?
Lifetime mortgages remain more popular than home reversion plans, and the former is easier to find. However, this does not necessarily mean you should always choose a lifetime mortgage over a reversion plan. You should discuss all options with an equity release adviser first.
Do I need financial advice before applying for equity release?
You need to get financial advice before applying for any type of equity release scheme. This is to make sure you understand everything about the equity release scheme and its long-term implications, including eventual costs. It is also used to explore alternative options and avoid equity release when possible and beneficial to do so.
Will my equity release loan be taxed?
The lump sum or drawdown facility you receive via equity release is not subject to tax. However, giving the money away could make that amount subject to inheritance tax if it applies to your estate and ticks other boxes.
Can I lose my state pension after releasing equity?
You cannot lose access to the basic state pension by releasing equity and increasing your personal wealth. It is not possible because the basic state pension is not a means-tested benefit. Nearly everyone has the right to receive it without wealth being considered. However, you may lose access to other benefits, including Universal Credit and Pension Credits.
What are my other options?
Another way to create a lump sum of cash for your retirement is to move to a smaller property that is less valuable than your current one. By downsizing, you could create a pool of money to use for your retirement or any other purpose. But keep in mind the additional costs and stress of moving, especially in later life.
Uncover more details about equity release
If you have any other questions about a home reversion calculator, lifetime mortgages and home reversion plan, do not hesitate to come back to MoneyNerd again soon. We have lots of guides discussing all of these topics and related FAQs.