Lifetime mortgage vs home reversion: which suits you?

Both products let you release money from your home without having to sell up and move out. That is where the similarity largely ends. A lifetime mortgage is a loan secured against your property; a home reversion plan involves selling a share of your home to a provider at a discount in exchange for a lump sum or income. Understanding that distinction matters before you speak to an adviser, because the financial consequences play out very differently over time.

This article covers how each product is structured, what the costs look like in real numbers, and the situations in which one tends to be considered over the other. For a broader overview of how equity release works, the equity release pillar guide is the right place to start.

How does a lifetime mortgage actually work?

You borrow a sum of money secured against your home. The loan, plus rolled-up interest, is repaid when you die or move into long-term care and the property is sold. You retain full legal ownership throughout.

Interest is the thing most people underestimate. Because most lifetime mortgages involve no monthly repayments, the interest compounds. At a fixed rate of 6.5%, a £100,000 loan doubles to around £200,000 in just over ten years and reaches approximately £350,000 after twenty. That is not scaremongering; it is compound arithmetic, and it is the first thing any good adviser will show you on a projection.

Some products now allow voluntary partial repayments, typically up to 10% of the original loan per year without an early repayment charge. This can significantly slow the accumulation. Aviva, Legal & General and Pure Retirement all offer this feature on their standard lifetime mortgage ranges, though the specific terms vary by product and by the interest rate available at the time you apply.

The Equity Release Council sets minimum product standards that all member providers must meet. Key among them: a no negative equity guarantee (you will never owe more than the property is worth), the right to remain in your home for life or until you need care, and the right to move to a suitable alternative property and transfer the plan.

How does a home reversion plan work?

You sell a percentage of your property to a reversion company at below market value. In return, you receive a lump sum or regular payments, and you are granted a lifetime lease allowing you to live in the property rent-free until you die or move into care. When the property is eventually sold, the reversion company takes its agreed share of the sale proceeds.

The discount on the valuation is substantial. A 65-year-old selling 50% of a £300,000 property might receive somewhere between £60,000 and £90,000 in cash, not the £150,000 that 50% of the market value would suggest. The provider takes a below-market price now in exchange for receiving a share of whatever the property is worth later, including any future price growth on that portion. You receive nothing further from that share, regardless of how much your home appreciates.

This structure means home reversion is genuinely different in character from a loan. There is no interest compounding against you. But you have also permanently transferred part of your ownership, with no right to buy it back.

What does the comparison look like in numbers?

Putting two scenarios side by side helps.

These figures are illustrative. The actual cash you receive from a reversion plan depends heavily on your age, health, the specific provider, and the property's value. Older applicants generally receive a smaller discount because the provider's wait for repayment is statistically shorter.

What are the genuine differences in risk?

The risks pull in opposite directions, which is why comparing the headline cash amounts without context can mislead.

With a lifetime mortgage, the primary risk is interest accumulation eroding the estate. If property values stagnate or fall at the same time, the combined effect can leave very little for beneficiaries. Voluntary repayment features and inheritance protection guarantees (where you ring-fence a fixed percentage of the eventual sale proceeds for your estate) are the main ways to manage this.

With a home reversion plan, you give up the upside on the sold portion. If your property doubles in value over twenty years, the reversion company benefits from that growth on their share, not you. There is no debt risk, but there is an opportunity cost that can be significant.

Neither of these is a flaw; they are simply how the products are designed. The question is which structure fits your circumstances better, which is a question for a qualified adviser with access to full market.

Are there situations where one is more commonly considered?

I would hesitate to frame this as "one suits X type of person", because the right product depends on specifics I cannot know from an article. What I can say is that certain features tend to attract interest in particular situations.

Lifetime mortgages attract more attention from people who want to retain full ownership, are comfortable with compound interest if they understand it clearly, and want access to a drawdown facility (releasing smaller amounts over time rather than one lump sum). Drawdown lifetime mortgages, offered by providers such as More2Life and Key Later Life Finance, allow you to take an initial amount and draw further funds as needed, paying interest only on what you have actually borrowed.

Home reversion tends to come up in conversations with people who are deeply averse to debt in any form, or whose primary concern is that they do not want their remaining share of the property to be eroded regardless of what happens to interest rates. Some people also find the structure psychologically simpler: you have sold a portion, you know what you have kept, and there is no accumulating figure to worry about.

Does either product affect benefits or tax?

Releasing equity affects means-tested benefits, and this matters more than many people realise when they first enquire. Pension Credit, Council Tax Reduction and help with care costs are all assessed against your capital. A lump sum from either type of equity release counts as capital until it is spent. If it pushes you above the savings threshold (currently £16,000 for Pension Credit), you may lose benefits you currently receive.

This is not a reason to avoid equity release, but it is a reason to speak to a benefits specialist before you commit. Age UK can provide benefits checks, and your local Citizens Advice may also help. Priya's guides on the Wiser Times benefits section cover this in more detail.

On tax: the lump sum itself is not income and is not subject to income tax. Interest paid on a lifetime mortgage does not attract tax relief for most personal borrowers. The sold share in a home reversion plan is not typically a capital gains event for the homeowner, but your solicitor will confirm the position for your specific circumstances.

What questions should I take to an adviser?

Going into an advice meeting with some preparation makes a real difference to the quality of the conversation. I'd suggest having answers ready on these points before you sit down with an adviser:

• What is the money for? A one-off purchase, regular supplementary income, or a care contingency fund each point toward different structures.
• Do you want to make any repayments, or does a no-repayment model suit you better?
• How important is leaving an inheritance, and is there a specific figure or percentage you have in mind?
• Do you currently receive any means-tested benefits?
• Are there other people living in the property who would need to be named on a joint plan?

The adviser's job is to work through all of this with you, model the scenarios using your actual figures, and explain the long-term implications clearly. If an adviser cannot show you a compounding projection for a lifetime mortgage, or cannot explain the discount mechanism on a reversion plan in plain terms, ask again.