Tread carefully with lifetime lease options
Following the growing coverage of so called sell-and-rent-back deals, I’ve been approached by a number of colleagues who have come across similar plans.
They are called lifetime lease schemes. Although not identical to sell-and-rent-back options, they are unregulated too.
Lifetime lease deals involve raising finance but not on current properties. Rather, they are taken out when consumers move home.
Lifetime leases are designed for clients who want to move but either cannot afford to or don’t want to fully fund the purchase price of the new properties.
So the lifetime lease firm buys property on behalf of consumers who in turn buy leases from it.
The lease entitles them to live in the property for the rest of their lives.
The purchase price of the lease is less than the actual value of the property because when the clients die the home reverts to the firm’s ownership.
And the actual purchase price is based on the age of the clients.
Here’s an example. Take Mr and Mrs Allan. They find a bungalow they want to buy, which is valued at £300,000, and have sold their home for £250,000.
They don’t have sufficient funds to purchase the bungalow and don’t want to use all the funds they have trying to buy.
So the lifetime lease firm purchases the property and, based on the Allans’ ages, offers the lease for £200,000.
This allows the couple to move into the higher value property and remain there for the rest of their lives.
At the same time it frees up £50,000 of the proceeds made from the sale of their previous property.
What are the alternative to this? Well, the Allans could have taken out a lifetime mortgage and raised the £100,000 they needed to fund the shortfall. And it could have been raised on the new property too.
Would this be a more productive option for the clients? Yes.
They would get to own the new property and their estate would retain any of the remaining equity in it after they die.
Lifetime leases should have been captured under reversion regulation and concerns were raised about their exclusion at the time.
The main concern has to be that clients who look at lifetime leases may not be comparing them with other options to evaluate their suitability.
Some firms are expanding into the lifetime lease market as they see this unregulated gap develop. So clients need to tread carefully and weigh up all the options.