Home Reversion
Learn about the benefits, risks, and costs of home reversion – an option that lets you unlock tax-free cash from your home while avoiding the hassle of moving.
What is a home reversion plan?
Home reversion offers a way to access tax-free funds from your property, providing a lump sum, regular income, or a blend of both without the need for rent, loan repayments, or interest. With this scheme, you retain the right to live in your property as a rent-free tenant until you pass away or require long-term care.
This option allows you to stay in your cherished home without downsizing or relocating, although the plans are portable, offering flexibility for future moves if desired.
By selling only a portion of your property to the home reversion company, you can ensure an inheritance for your family, with their share of proceeds dependent on the property’s future market value.
How does home reversion work?
The amount of money you can get from a home reversion deal is influenced by several factors, such as your age, health, lifestyle, and the value and condition of your property. It’s important to understand that the cash you’ll receive will be less than what your home is worth on the market.
Home reversion companies usually pay out around 30–60% of the current market value of your property.
The older you are, the higher the percentage you might get. They offer less because you can stay home without paying rent, possibly for many years. Plus, unlike other types of equity release, the company won’t earn any interest on the cash they give you. And they can’t predict precisely when they’ll get their money back or the future housing market.
Home reversion isn’t right for everyone, and most people use a different type of plan called a lifetime mortgage. However, for some folks, home reversion could be an excellent way to get more money from their home than with a lifetime mortgage.
Home Reversion Explained Video
Watch the video below to see Paul Archer explain home reversion beautifully:
What’s the difference between a lifetime mortgage and a home reversion plan?
Wondering about the distinction between a lifetime mortgage and a home reversion plan? Well, the main differences boil down to two key factors:
Home Ownership
When you opt for a lifetime mortgage, you still maintain full ownership of your home, retaining 100% ownership rights.
Conversely, with a home reversion plan, you’ll sell all or a part of your home to the equity release provider. Despite this, both options grant you the privilege of residing in your home until you pass away, decide to sell the property, or require permanent care.
Interest Payment Arrangements
With a lifetime mortgage, interest accumulates over time in a compound manner. This setup can lead to a rapid escalation in the total owed amount, as you pay interest not only on the principal loan but also on any already added interest.
In contrast, a home reversion plan offers a different approach. Here, you don’t have to worry about interest payments or repayments.
The provider includes the interest in the price they offer for the share of the property you sell to them. This means you can enjoy the benefit of living in your home without the burden of interest, rent-free throughout the arrangement.
Comparison Table
| | Home Reversion Plan | Lifetime Mortgage |
|---|---|---|
| You retain full ownership of your property. | No | Yes |
| The mortgage lender has a registered charge on your property. | N/A - You are selling part/all of your home. | Yes - The same as a residential mortgage. |
| What is the maximum loan amount? | Based on your age and your property value. | Based on your age and your property value. |
| Your eligibility is based on your income and expenditure? (affordability assessed) | No | No |
| Mandatory monthly payments are required. | No | No |
| Voluntary payments can be made. | Sometimes | Yes |
| Minimum age of applicants. | 60 years old. | 55 years old. |
| Maximum age of applicants. | No maximum age. | No maximum age. |
| You have the right to live in your property for the rest of your life. | Yes | Yes |
| Your interest rate is fixed. | N/A - You are selling part/all of your home. | Yes for the lifetime of your mortgage. |
| Move Home When You Want | No | Yes |
| Downsizing Protection | No | Yes |
| Significant Life Event Exemption | No | Yes |
Drawbacks of Home Reversion
Home reversion schemes offer certain advantages, but they also come with potential risks that you should carefully consider. It’s crucial to consult with a specialist before making any decisions.
Some drawbacks of home reversion plans include the significant difference between the value you receive for a share of your property and its current market value, the potential loss of a substantial portion of your home’s market value for your loved ones if you pass away shortly after taking out the plan, and the fact that your loved ones won’t inherit anything if you sell 100% of your property.
Additionally, you need to be 60 or older to qualify for a home reversion plan, and it may be challenging to reverse the plan if you decide to buy back part of your home later.
Furthermore, you no longer have full legal ownership of your home, and having a large cash lump sum could affect your entitlement to certain means-tested state benefits.
Home Reversion example
Let’s consider a simple scenario. Imagine a couple in their early seventies who cherish their current home but seek extra income for retirement. Upon considering home reversion, they find a solution that fits their needs.
Opting to sell 80% of their home to a home reversion provider, they secure a lump sum. Assuming their house is valued at £320,000, they would receive £256,000 from the provider.
Although the provider retains 80% of the property’s final value, the couple ensures a potential inheritance for their family, who would receive the remaining 20% upon the property’s sale, based on its future market worth.
Protection and Guarantees
Equity release is regulated by the Financial Conduct Authority (FCA), ensuring certain standards are met. Advisors must consider alternative funding options for clients.
Additionally, the Equity Release Council, the industry’s regulatory body, mandates certain guarantees for member providers:
- No Negative Equity Guarantee: You or your family won’t owe more than your property’s value to the lender.
- Lifetime Home Occupancy: You have the right to stay in your home for life.
- Flexibility to Sell: You can sell your home and move without penalties.
- Penalty-Free Partial Repayments: You can make partial repayments without penalties.
- Fixed or Capped Interest Rates: Your interest rates remain fixed for life or capped at a maximum level.
How much can you borrow?
The amount of money you can get from a home reversion plan depends on factors like your age, health, lifestyle, and your property’s condition and value.
Just remember, what you’ll receive will be significantly lower than what your property is worth now.
Typically, home reversion providers offer around 30% to 60% of the current market value. And the older you are, the better the deal you might get, with a higher percentage of your property’s market value likely to be offered.
Alternatives to home reversion
While home reversion can provide a welcome cash injection, it’s not the right choice for everyone.
Alternative options worth considering include tapping into your savings, selling assets, accessing grants, checking your entitlement to benefits, remortgaging, or considering Retirement Interest-Only (RIO) mortgages. Other possibilities include downsizing to a smaller home, seeking support from family and friends, or renting out a spare room.
Each option has pros and cons, so weighing them carefully to find the best fit for your financial situation and lifestyle is essential.
Can you switch equity release?
If you’re already engaged with a lifetime mortgage, exploring the option to switch could be a wise move. There’s a chance you could secure a better deal, particularly if you’ve aged since taking out your existing plan.
Additionally, any increase in your property’s value or changes in your health status might qualify you for additional funds.
Moreover, fluctuations in interest rates could potentially result in substantial savings over the lifespan of your plan.
It’s worth investigating your options to ensure you’re making the most financially sound decision.
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While we do not provide a quote or call-back service as our website is purely informational, we understand that some people do want an equity release quote.
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