Deferment Rates Explained

What's a Deferment Rate? Simply Explained

Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui

Financial Terms Can Be Mind-Boggling, Even for the Experts. However, You've Got to Be In the Know When Working to Secure Your Financial Future. We've Got You Covered With Explaining Deferment Rates Simply So That Anyone Can Understand Them.

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Deferment Rates Simply Explained

Congrats on making the vital steps towards a financially stress-free retirement!

However, if you’re not up to date with all the necessary mortgage terms, you could end up being taken advantage of by the so-called ‘experts’.

Fear not! We’ve got you covered.

We’re here to share:

  • What a deferment rate is.
  • Why it’s an important term to know.
  • How it’s related to property valuation and equity release.

As leading experts in the later-life mortgage field, we’ve put together a dictionary of all the necessary financial terms and simplified them to help you release equity with ease.

Are you curious to learn about deferment rates?

Find out now!

What Is a Deferment Rate?

A deferment rate is linked to property valuation1. It’s the discounted rate that’s applied to your current property value in order to assess the present value of the right to vacant possession of your home when the lease2 expires.

The deferment rate is the most vital component in calculating the costs of lease extension.

*Vacant possession is a legal document covering all the terms of selling your property before it’s passed from one party to another.

The Background of Deferment Rates

When it comes to property ownership, the landlord owns a ‘reversion’.

This means that when a lease comes to an end, they’ve got exclusive rights over said property to then sell or rent.

If a lessee were to be enfranchised3, they’d have total possession of the house, and the landlord would use the reversion value.

There are 2 acts to ensure that the landlord is compensated for this loss in value:

  • The Leasehold Reform Act 19674 is for houses.
  • The Leasehold Reform, Housing and Urban Development Act of 19935 is for flats.

The compensation amount requires determining an estimated value of the deferred possession of the property.

In terms of renting, this will be the property value minus the loss of income or use during the lease period.

The total value of deferred possession comes from the deferment rate, or the rate of return that the homeowner would have received after management, void, and maintenance costs, during the lease period.

Owners would typically want a high deferment rate.

What Are the Types of Deferment Rate Methods?

The 2 types of deferment rate methods are the Sportelli Method and the Hedonic Regression Method.

Here’s more information:

  • Sportelli Method This is the most common method used by the Lands Tribunal, and for maths boffs, it is calculated as such: q = r* + P – g*
  • Hedonic Regression Method This alternative was proposed by Bracke et al. in October 2016. It’s based on collected market data for leases in the period of 1987 and 1991. Its goal is to isolate the effect of the value of an unexpired lease length through statistical analysis. The Upper Tribunal6 rejected this method in January 2018.

What’s This Got to Do With Equity Release?

Deferment rates are relevant with equity release, as the deferment rate sits at 1% annually for these products.

It’s used as an effective valuation tool to determine the total value of your estate, how much equity is in it, vs the value of your property when you pass away or move into permanent care.

The rate reflects the rate of return you’ll receive on the initial property price that’s agreed to. It’s used to determine the deferment price.

The deferment price differs from the forward price of the home in that the forward price is also agreed to at the beginning of the plan but is settled in the future.

These rates differ from the growth in market property value, which is usually 8% annually.

In Conclusion

While equity release can seem complicated, you’re not alone in the process.

Not only do you have excellent resources like ourselves to give you up-to-date knowledge, but you can also speak to a financial adviser who will be able to help you determine the best retirement moves for you and your family.

Editorial Note: This content has been independently collected by the SovereignBoss advisor team and is offered on a non-advised basis. Sovereignboss may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.

rachel w

Rachel Wait
Personal Finance Journalist

Rachel is an experienced finance journalist and editor with a particular interest in personal finance and consumer affairs. She has vast experience writing about money issues, property, insurance, and consumer affairs, and you’ll find her articles regularly featured in top media and newspaper publications.
John Lawson

Written by
John Lawson
Founder SovereignBoss

John is passionate about education and has made it his life-long mission to assist UK citizens on their future financial options, with a specialist interest in equity release, and SovereignBoss is the natural extension of this passion.
francis

Reviewed by
Francis Hui
Senior Risk Manager

Having held various high-level roles across the industry, Francis is truly an expert in aiding UK citizens in their financial decisions and risk analysis. His unique insight and statistical knowledge make him the perfect person to help you take your financial future to the next level.
kath icon

Katherine Read
Consumer Affairs Writer

Since joining the editorial team at SovereignBoss, Katherine has become focused on bringing transparency to finances and opportunities for those approaching retirement age. She writes on the topics of equity release, home reversion, and mortgages.
nicola

Nicola Date
Writer & Journalist

Nicola is a financial writer for SovereignBoss and is passionate about the opportunities that equity release can open up for homeowners. Her extensive business experience and deep understanding of the industry means that she’s always up-to-date with the latest developments.

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