Expectations are running high in the equity release market that home reversions plans could become a more popular choice in view of the current housing & economic climate.
It is common knowledge that in periods of low house price inflation, home reversions can become the favourable option as opposed to the roll-up lifetime mortgage.
The two comparable equity release schemes can experience different fortunes in such a static housing climate.
In summary, a home reversion scheme involves selling a percentage of the value of the property to the reversion company in exchange for a lease for life.
Therefore, in times of low house price growth the reversion company will not make as greater profit, as they will not benefit from the property value increasing.
In contrast, a roll-up lifetime mortgage in times of low house price inflation would suffer. Due to the nature of the plan & with the annual compounding of the interest, it would result in the ever increasing debt catching up with the property value quicker than if the house price was increasing.
From a lifetime mortgage lenders point of view this scenario could eventually invoke the ‘no negative equity guarantee’ on a more common basis. This could then have a knock on effect on the lifetime mortgage company’s product structure & pricings in the future.
We have already seen the impact of potential future costs on this market with the recent withdrawal of some of the equity release companies
Therefore, home reversion plans are based more on the expectations of house prices, whilst lifetime mortgages are driven more by interest rates.
So, do home reversion plans now offer better value for money in the current economic climate?
Well, recent research, commissioned by Bridgewater Equity Release, seems to suggest exactly this.
Previously, equity release schemes were criticised for offering poor value for money, but the research from Bridgewater equity release now is dispelling this myth.
Home reversion schemes are roughly paying anywhere between 40% and 60% of the current market value of the property.
To determine the capital amount the customer receives, the provider would assess how much they feel the house price will increase over the life expectancy of the customer.
Home reversion schemes were the first type of lifetime mortgage product in the market with Hodge Lifetime being one of the forerunners.
So, could the equity release market now start turning full circle?
About The Author:
Mark Greggs is the founder of Equity Release Supermarket who were recently accredited ‘Best Financial Advisers’ at the Equity Release Awards 2008.
Mark is an experienced Independent Financial Adviser who has now been providing quality equity release advice for the past 8 years.
Gained with this experience is exclusivity to deals with some of the UK’s leading financial providers. Mark aims to pass on his experience in assisting the over 55’s decide whether equity release is the right choice for them.
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