Attaining true figures for the type of equity release you wish to take out is wholly dependent on the tools you use for that calculation. A home reversion calculator is different from a lifetime mortgage calculator in the main factors used to determine the maximum amount of equity that can be released.
Calculating Lifetime Mortgage Maximums
For a lifetime mortgage two values are necessary to enter into a standard lifetime mortgage calculator. The first is the age of the youngest person in the household. The minimum age for taking out a lifetime mortgage is 55 with some companies with a maximum age of 90.
Given that lifetime mortgages do not require repayment of capital sum or interest until the homeowner dies or decides to move into long term care, the lender has to calculate the maximum amount based on the potential life expectancy. Therefore, the younger the person the less they can obtain in a maximum sum and the older the person the more they will receive.
Property value has to be at least £60,000 and some require at least £70,000. There are a variety of companies in the UK willing to offer lifetime mortgages to retirees. As you should expect the more value your home has the more you can get as a maximum lump sum of cash.
The cash is always tax free in this stage of release. It can be used as you wish. You do retain ownership of the home in full.
How Home Reversion is Calculated
Home reversion is calculated using three values. The age is used, where the youngest homeowner has to be at least 65 years of age. A younger age is not useable. This is due to how home reversion works. The home is actually sold in this scenario. It can be sold in full or part. It is up to the homeowner and the maximum amount of cash they require. As the money paid out by the home reversion company is not paid back, their only ability to receive a return on their investment is to use a percentage of the home value as the payment to you and hope appreciation occurs on the home.
Property value will also be an input value. Similar home values are used as in lifetime mortgages for the base amount of value you need to have.
The next part of the calculation is based solely on the amount of home you are willing or need to sell. The percentage of property you sell, your age, and the property value determines the actual cash value the company provides. The home reversion calculator will never show you 100% of the home value as the maximum lump sum available to you even if you sell 100% of the home.
As mentioned, the company needs to have a return on their investment. Their percentage of lump sum offered has to be based on how long you will live, how much you are willing to sell of the property, and its applicable value.
For those with a shorter life expectancy more can be released in value percentage than a younger person or a person in great health. It works the same with lifetime mortgages.
Difference of Lifetime Mortgage versus Home Reversion
Already you understand one is a loan and the other is a sale. It makes the overall result different. For a lifetime mortgage the calculator is going to account for compounding interest. An interest rate for a standard lump sum will be used to determine the maximum lump sum. On a comparison site the calculator may take several fixed interest rates based on current market products to provide you a range of values.
This value is what you receive in cash, then you have to know based on that lump sum how much the loan will total to after a given period of time with the interest rate. If the home is worth £100,000, a loan to value percentage of 30% at age 65 is usually given. This means £30,000 for you leaving £70,000 in home value for the compounding interest.
The loan given should have a no negative equity clause to protect against the loan becoming more than the value based on life expectancy. This amount and interest has to be repaid. Home reversion may lose control of full home ownership, but at least there is nothing to repay in the end and more home can be sold later depending on what you put into the home reversion calculator as the percentage to sell.