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More people are looking at getting cash from their home than ever before and the industry has responded with a number of products. But which is best?
New research published this week by the Financial Services Consumer Panel provides actuarial statistics to show that to get cash out of the value of your house, downsizing to a cheaper home is generally the most cost effective method, followed by taking out a standard ‘lifetime mortgage’, and the most expensive is likely to be a ‘home reversion’.
The Consumer Panel commissioned actuaries Watson Wyatt to undertake research into the value of equity release products and to provide a comparison of the costs including the cost of selling and buying a smaller home.
Lifetime mortgages and Home Reversions are the commonest equity release products available. A standard lifetime mortgage involves a homeowner taking out a mortgage with interest being rolled up and added to the total outstanding loan instead of any monthly payments being made.
The debt is repaid on selling the property when the homeowner dies (or goes into long term care), and most have a no negative equity guarantee, so the debt should not exceed the value of the house.
A home reversion involves the home owner selling all or a proportion of their property at a discounted rate for a lump sum. Then, when the owner dies (or goes into long term care), the property must be sold and the agreed proportion or entire proceeds of the sale price given to the reversion provider.
Home reversion products came out as twice as expensive as the next most expensive option, if the plan only runs for 10 years, assuming house price inflation of 4% a year. Using the same assumptions, it seems that a 65 year old would have to live for 30 years to see anything like the same value from a home reversion as a lifetime mortgage.
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Reversion amount |
Assumed future lifetime |
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10 years |
20 years |
30 years |
40 years |
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Males |
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65 |
£36-41,000 |
15.2%-13.7% |
9.5%-8.7% |
7.6%-7.1% |
6.7%-6.3% |
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70 |
£42-46,000 |
13.4%-12.4% |
8.6%-8.1% |
7.1%-6.7% |
6,3%-6.0% |
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75 |
£48-51,000 |
11.9%-11,2% |
7.9%-7.6% |
6.6%-6.4% |
5.9%-5.8% |
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80 |
£54-55,000 |
10.6%-10.4% |
7.3%-7.2% |
6.2%-6.1% |
5.6%-5.6% |
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Females |
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65 |
£40-44,000 |
14.0%-12.9% |
8.9%-8.4% |
7.2%-6.9% |
6.4%-6.2% |
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70 |
£45-49,000 |
12.6%-11.7% |
8.2%-7.8% |
6.8%-6.5% |
6.1%-5.9% |
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75 |
£51-55,000 |
11.2%-10.4% |
7.6%-7.2% |
6.4%-6.1% |
5.8%-5.6% |
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80 |
£59-62,000 |
9.6%-9.1% |
6.8%-6.5% |
5.8%-5.7% |
5.4%-5.3% |
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Note: assumed property valued at £100,000, and assumed house price inflation of 4% per year.
Source: Watson Wyatt |
When costs were compared on a house valued at £250,000, where the owner wishes to release £50,000, trading down was the clear winner.
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Comparison of costs in releasing £50,000 from property valued at £250,000 for 20 years
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Financial product/action |
Assumptions |
Effective interest rate |
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Standard Lifetime roll-up interest mortgage |
Release £50,000, assuming mortgage rate of 6.25% pa and initial fees of £1,500 and £200 redemption fee after 20 years |
6.42% pa |
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Home reversion plan |
Release £50,000 by giving up 50% of value of £250,000 home. Assume property inflation of 4% pa and initial fees of £1,500 and £200 redemption fee after 20 years. End of 20 years, property value would be £547,781 – with 50% (£273,891) owned by reversion provider. |
9.05% pa |
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Downsize by selling property |
Sell £250,000 house – retain £50,000, use £5,000 in fees, and buy £195,000 property. Assume property inflation of 4% pa. After 20 years, new property is worth £427,269 whereas old property would have been £547,781, so cost to consumer is difference between values plus £5,000 fees. |
4.5% pa |
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Source: Watson Wyatt |
John Howard, chairman of the Financial Services Consumer Panel said: "Many people see their house as a potential source of income when they get older but equity release deals often don’t look like good value.”
“This analysis compares the costs and provides useful information for homeowners to make the best decision for them. At the same time the research seems to show that companies are not making excess profits from these products. However taking out any equity release product is a complicated decision and we would advise consumers to take advice before signing up to any of them.”
“Home reversions are due to be regulated by the FSA shortly. Consumers should be aware that there is no obligation on financial advisers to tell customers that down-sizing without taking out any financial product, is likely to be the cheapest option."
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