Are you looking for a way to release equity? One of the most popular equity release schemes, alongside lifetime mortgages, is a home reversion. So what home reversion and is it right for you?
What Is Home Reversion?
A home reversion scheme is one of the main types of equity release schemes as a way of improving your personal means. Home reversion is completed through the selling of all or part of your property at less than its market value, in return for a tax-free lump sum, regular monthly instalments or both.
Unlike is the case with other equity release schemes, home reversion schemes allow you to continue living in your home as a tenant, rent-free. The money released using this scheme can be used to fund long-term care or for other personal projects.
When the house is eventually sold, the lender receives their share of the proceeds to pay off the loan, leaving the rest of the equity to your offspring if you released a percentage of your home’s equity. If you sold the entire property, the lender receives all of the proceeds of the sale.
If you need to boost your income with a lump sum, or else through additional monthly income but have no desire to downsize, then a home reversion may well be something to consider.
Reversion companies will usually offer between 20 and 60 per cent of the market value of your house, depending on your age and the state of the house. House prices fluctuate, and these companies are ultimately taking a risk that your home will bring a return on their investment when you eventually pass on.
Which home reversion scheme is right for me? Lump sum, income or both?
Home reversion schemes allow for the choice of how you receive your equity. You can receive it as a one-off, tax-free lump sum, as a monthly income for the rest of your life or else a combination of the two. This offers the flexibility and security that participants so desire.
Taking out the equity release as a lump sum gives you the freedom to manage and spend your money as you wish, but there is always the worry that if you live to an unusually old age that the money may not stretch as far.
The option of a monthly income provides the peace of mind of regular, consistent payments but if the unfortunate situation arises where the recipient dies soon after taking out the plan, a large proportion of the inheritance would have been lost for very minimal benefit.
Some equity release providers now allow customers to use a ‘drawdown’ service which allows them to release money as and when they need it. Interest bills are kept down because it is only charged on the cash that you have actually released.
Who can get a home reversion scheme and how much does it cost?
Home reversion schemes are generally considered as additional support alongside pensions and are only available to UK homeowners who are aged 65 or older. In most cases, your property must also be your main residence, located in England, Scotland or Wales and worth a minimum of £120,000.
The cost of the scheme depends entirely on the percentage that you wish to cash in as released equity, but this cost will be released to you in either a lump-sum payment or as a monthly income. Any profit made from the selling of your house when you either die or go into long-term care will be distributed depending on the percentage you still own, meaning that a significant increase in the market could result in lost profit should you choose to release equity.
When taking out your plan, you may also face some set-up expenses such as valuation fees, arrangement fees and advisory fees. Legal fees covering a solicitor who acts on your behalf and the cost of any necessary maintenance are also additional costs to consider before taking out a home reversion scheme.
Typically, the older you are when taking out the scheme, the higher percentage you could be offered but the amount offered depends on both how healthy you are and the overall value of your house.
Usually, the amount of money that you can raise through a reversion scheme is larger than would be the case if you chose to take out a lifetime mortgage.
Because home reversion can affect state benefits, it is worth asking an advisor how home reversion will affect your income tax position and your eligibility for these benefits. Benefits that may well be affected can include pension savings credit, income support and council tax reductions so if you are beneficiary to any of these benefits then finding out whether they will be affected prior to taking out an equity release scheme is recommended.
Five advantages of home reversion plans.
1. No monthly repayments
Home reversion schemes are not loans; no interest is accrued, and monthly payments are not necessary because of this. Other equity release schemes, such as lifetime mortgages charge interest on the loan released to you and can grow considerably in cost over the years because this interest is compounded. You will not have to pay back a single penny if you choose to release equity through a home reversion plan.
2. Selling part of your property may be of financial benefit if the market increases
If you’re over the age of 65, then applying for a reversion plan is even simpler. You don’t have to worry about repayments during your lifetime. Selling part of your property, as opposed to the whole, allows you to benefit from any increase in the property market for the portion that remains in your ownership, as well as giving you the financial security of the lump-sum payout for the part you cashed in for equity.
This lump sum ensures that you have a specific amount to leave behind as inheritance to your loved ones. If you chose to sell 50% of your property, any increase in value for your 50% of the property remains in your possession until you decide to sell.
3. You can release more equity than with a lifetime mortgage
Lifetime mortgages are restrictive in the amount of money you are allowed to release; home reversion schemes allow for a higher amount of cash to be released. This is particularly advantageous if you have no beneficiaries to leave your estate to, giving you the freedom to spend the cash as you wish. You can use the money in any way you like – to cover the cost of home improvements or to take the holiday of a lifetime, for example.
4. You can continue living in your home
Often, taking money out of your home through equity release such as home reversion schemes is sometimes seen as an alternative to downsizing, as it allows you to benefit monetarily while also ensuring that you can stay in the home that you have no doubt grown to love.
While downsizing involves selling your house and moving to a smaller, less expensive home and using the profit to support your income, home reversion allows for this income support without losing your family home, minimising stress and the expense of relocating. Although lifetime mortgages will enable you to keep possession of your home, interest repayments or else accrued interest on the loan means that less equity can be sold on after your death.
5. You can increase the percentage that you sell depending on your circumstances
If you initially decided to sell 20% of your share of your home, but your personal circumstances change to the extent where you require additional cash, it is possible under some home reversion schemes to generate extra income through additional percentage sales.
There is no standard home reversion scheme and policies differ from provider to provider so shopping around to get the most appropriate scheme for you is particularly important.
As well as benefiting from house price rises on the share you own in your property, you can also protect yourself from falling house prices – because you have already sold a significant percentage of your home if house prices fall then there will be no impact on the proportion you have sold. If you would like to learn more you can use this equity release calculator to find out how much money you could get from your property.
What are the disadvantages of home reversion?
Home reversion plans are high-risk products and can have major implications for long-term financial planning, as well as tax, state benefits and the inheritance you can leave behind after your death.
1. Lose Out On Value
While an increase in market value price can be seen as an advantage, it could also be considered a disadvantage due to the fact that you give up the right to benefit from increases in value on the share you have sold to the lender, irrespective of if it is more than the amount that you sold the share for.
2. Shared Ownership
Using a home reversion scheme to release equity holds the disadvantage of it no longer being just your home – you will share ownership with the lender. If you sell the entirety of your home to the lender, then you will no longer own your house and will live there as a tenant, without the cost of rent.
3. Expensive Buy Back
If, for whatever reason, you decide to end the scheme earlier than the length of your life, you would need to buy back the share you sold for the current market value, which could be a lot more expensive than you initially sold it for.
4. Age Limit
Unlike as is the case with lifetime mortgages, you or your partner must be 65 years old – lifetime mortgages require the borrowers to be 55 years old. If you’re under 55 years of age then you may need to consider a loan if you wish to release equity from your property.
5. Time It Takes
Home reversion plans can ultimately take longer to carry out because of the nature of the scheme, with home reversion companies using specific criteria prior to acceptance of any property. Home reversion schemes are less flexible than lifetime mortgages, and it can be particularly difficult to end the plan and buy back the percentage you sold – usually, this is done at a significantly higher cost than the amount you originally sold it for.
As is the case for loans or schemes of any sort, it is essential to seek financial advice before proceeding with releasing equity by speaking to an independent financial advisor.
Some reversion plans have restrictions on them that mean you have to notify the company if your circumstances change in one way or another. Taking a tenant on, or allowing a friend to stay with you, are circumstances where companies must be informed, and often these people are asked to sign a document that waives their right to remain in the property should you pass on.
Another restriction on the property may be the amount of time you are allowed to leave it empty on an annual basis, so if you have property abroad or else spend a lot of time away from home, then this should be something to bear in mind.
Two alternatives to home reversion schemes
Naturally, there are a number of other options to home reversion schemes which could be considered if you have doubts about whether home reversion is for you. Equity release can be a difficult market to navigate so finding a number of options is advisable before taking the leap.
1. Downsizing your current home
For some, the thought of selling a home that has raised children and grandchildren is a painful thought to bear. Downsizing your home, albeit slightly stressful, could be a viable alternative to home reversion or other forms of equity release as it offers that release of personal wealth as well as ensuring that you have a property to leave as inheritance.
If you want to leave your home to your offspring but are in need of cash, downsizing and spending the difference may be a more appropriate choice than equity release.
2. Other types of equity release scheme
If home reversion doesn’t seem like the equity release scheme for you, other options such as lifetime mortgages are alternative options to explore. Lifetime mortgages allow you to remain as the sole owner of your property but can involve significant interest repayments. It is also possible to take out a lifetime mortgage at a younger age than is required for home reversion.
If you opt to take out a home reversion scheme, then you also agree to commit to the proper maintenance of your property while you live there. This is due to the fact that technically, you no longer own the property but are in fact renting it from the provider of your home reversion plan.
If this is not done to a satisfactory standard, then the reversion company may choose to carry out the work themselves and consequently invoice you for this. If your property is old and more expensive to maintain then maybe an alternative to home reversion should be considered.
How to find the best home reversion scheme for you?
Finding the best home reversion scheme suited to your needs involves research and depends entirely on your personal situation, the reason for your need to release equity and your future prognosis. It is absolutely essential that you use a specialist to secure your scheme, ensuring that your needs and your best interests are protected. Finding an adviser is beneficial and ensures that any decisions you make regarding equity are well-reasoned, and the risks involved with taking out a home reversion scheme are minimal.
Home reversion plans that meet the standards of the Equity Release Council guarantees both lifetime tenancy in your property and the option for the scheme to be transferred to a new property, subject to the approval of the plan provider.
Both of these guarantees are on the basis that you maintain the property to a reasonable value and continue to fulfil the terms of the agreement. Reputable equity release providers will be a member of the Equity Release Council, an industry body that sets specific, high standards for its members to follow.