What Are Home Reversion Schemes and How Do They Work in 2024?
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- Home reversion in equity release refers to selling a part or all of your property to a reversion company in exchange for a tax-free lump sum or regular income.
- It operates in the UK by offering homeowners over 65 the opportunity to sell a part or all of their home while retaining the right to live in it rent-free until they pass away or move into permanent care.
- The main advantages are that it's a guaranteed way to access a lump sum or regular income, while the major downsides are the loss of property ownership and the potential impact on means-tested benefits.
- Home reversion impacts your estate by reducing its value, as the portion of your home sold to the reversion company is no longer part of your property when you pass away.
- Whether it's a good idea for equity release depends on individual circumstances, such as your age, health, and financial needs, as well as your plans for your estate and potential inheritance.
Home reversion plans are part of the UK's equity release landscape, allowing homeowners aged 65 or over to unlock the value tied up in their property without having to move.
In This Article, You Will Discover:
The team of financial experts at Every Investor has examined the nuances of these plans to bring you this user-friendly guide.
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Continue reading to find out if it is the post-retirement financing solution for you.
What Is a Home Reversion Plan?
A home reversion plan is a type of equity release, allowing homeowners aged 65 or over to sell 25% to 100% of their property in return for a lump sum, regular payments or both, while staying in their homes.
It provides a solution to financial needs later in life without the need to move. Unique to the UK market, the homeowner also retains the right to live in the property until they pass away or move into long-term care.
The key aspect setting the Home Reversion Plan apart is that it is not a loan and thus does not accrue interest.
Instead, once the property is sold, the reversion company owns all or part of the property and will receive its share of the proceeds when it's sold after the homeowner's demise.
Of course, it is essential to seek professional advice before committing to a Home Reversion Plan due to the long-term effects it may have on estate planning and tax liabilities.
How Does a Home Reversion Plan Function?
A plan works by letting you sell a percentage of your property (usually between 20% and 100%) to a provider and continue to live in your property, usually rent-free, for the rest of your life or until you move into permanent care.2
In exchange, you will receive a tax-free lump sum, regular access to a cash reserve, or a combination of both, and the provider will recover it's share when your home is sold or when you pass away or move into long-term care.
What about interest?
Interest is not charged on these plans, as they are not loans.
When it comes to equity release, home reversions are less popular than lifetime mortgages, possibly because of the loss of property ownership, reduced inheritance potential, limited share in property value growth, inflexibility of the contract3, and low valuations.4
Typically, the amount you receive will range between 20% and 60% of the market value of your property5, depending on factors such as your age and the type and condition of your property.
The older you are at the commencement of the plan, the greater the percentage of your property’s value you are likely to receive.6
How Do Reversion Mortgages Differ from Home Reversion Plans?
Reversion mortgages, a less common term, often refer to home reversion plans themselves.
The key difference is primarily in terminology rather than the product's function.
Both involve selling a portion of your home's equity for a cash sum, but "home reversion plans" is the more widely used term to describe this type of equity release.
How Can You Release Capital from Your Property Using a Home Reversion Plan?
By entering into a home reversion plan, you can release capital from your property by selling a part or all of it to a reversion provider.
In return, you receive a lump sum or regular payments, while retaining the right to live in your home rent-free for life or until you move into long-term care.
This arrangement can provide financial freedom in retirement without the obligation to make monthly repayments.
What Are Some Examples of Home Reversion Plans?
Examples can help you understand how these plans work in the real world.
To illustrate, we will walk you through two different examples: One showcasing a full reversion, and the other a partial reversion.
What Is an Example of a Full Home Reversion Plan?
A full home reversion refers to a plan where the homeowner sells 100% ownership of their property to a reversion company.
A full reversion could look something like this
Mr Smith, 70, owns a property worth £500,000. He decides to enter into a full plan, selling 100% of his property to a reversion company.
Typically, he may receive around 35% of its market value, amounting to £175,000.
He continues to live in his home rent-free for life, but the property now belongs to the reversion company.
What Is an Example of a Partial Reversion Plan?
On the other hand, a partial home reversion involves selling only a portion of the property, usually a specific percentage.
A closer look:
Mrs Brown, 75, chooses a partial plan.
She sells 50% of her £300,000 property and receives around 35% of this portion, netting her £52,500.
The remaining 50% of the property's value is preserved for her family or future needs.
*The above examples are fictional and are merely used for illustrative purposes.
Are Home Reversions a Relevant Option in 2024?
Home reversions are still relevant and provide a viable option for senior homeowners to access tied-up equity whilst ensuring lifelong accommodation.
With the UK's ageing population increasing7, these plans can offer financial stability in retirement.
However, considering you will receive below market value, explore all options before choosing a plan, and seek guidance from a qualified equity release advisor or broker to receive tailored advice based on your circumstances and future goals.
Who Is Eligible for a Home Reversion Plan?
UK homeowners aged 65 and over can get a plan if they own (and live in) a UK property worth a certain amount, usually over £80,000.8
If you meet these requirements and are approved, you will also be required to maintain your home to the provider’s standard
Age can be an important factor:
Typically, the shorter your life expectancy, the sooner the provider will be able to recoup it's loan and, consequently, the more you may be able to borrow.9
What Is the Minimum Age to Qualify for a Home Reversion Plan?
To qualify for a home reversion plan, you typically need to be at least 65 years old.
This age requirement ensures that the plan is accessible to those in or approaching retirement, providing a financial solution tailored to the needs of older homeowners.
It's important to check with individual providers, as age requirements can vary slightly.
What Are the Advantages of Home Reversion Plans?
The advantages include guaranteed occupancy for life and access to a lump sum.
A quick summary of the potential benefits:
- No need to make repayments: Plans offer a distinct advantage over other forms of equity release; as there is no loan involved, no repayments are necessary unless you have opted for a plan that requires rental payments.10
- Access to a lump sum: You can access a significant tax-free lump sum, enabling you to fulfill immediate financial needs or aspirations.
- Protection against property value decrease: You can safeguard against future property value fluctuations because once you have sold a portion of your property, you will not be affected by any fall in the property's value.
- Guaranteed occupancy for life: The plan guarantees lifetime tenancy, providing peace of mind, as you have the right to reside in your property rent-free (unless paying rent is part of your agreement) for life.
What Are the Disadvantages of Home Reversion Plans?
The disadvantages include the fact that you will be relinquishing part or full ownership of your home, it could affect your eligibility for benefits, and you will not receive the full market value for the portion you sell.
More details on these points:
- Selling all or part of your home: You will receive less than it's market value for your home.
- Decreased inheritance: It will reduce the value of your estate and affect the inheritance you can leave behind.
- Limited equity release: The cash received is generally lower than that which may be obtained through alternative later-life lending options.
- Potential impact on benefits: Obtaining a large lump sum can potentially affect your entitlement to means-tested benefits.
As with all financial decisions, considering a home reversion plan necessitates professional advice from an equity release advisor or broker.
By analysing your financial situation, they will offer honest and relevant recommendations while protecting your interests.
Where Does Home Reversion Fit Within the Broader Equity Release Market?
Home reversion occupies a unique niche within the equity release market, offering an alternative to lifetime mortgages for homeowners looking to access the equity in their property.
It's particularly suited for those who wish to secure a guaranteed inheritance for their family by selling only a part of their property.
As part of a comprehensive equity release strategy, home reversion provides an option for homeowners who prefer a no-debt solution to utilizing their home's value in retirement.
What Should You Consider Before Opting for Home Reversion?
It is important to consider the financial and emotional aspects of the decision.
The Financial Aspects of Home Reversion Plans
Financial aspects of home reversion plans depend on factors like your age, property value, and the percentage you sell.
Keep the following in mind:
- Home reversion providers tend to offer 20%-60% of the property's value11, and the amount may increase with age.12
- How much you can release will depend on your age13, property value, and health.14
- Fees include valuation, legal, and maintenance costs.15
- You can receive the money as a lump sum or regular payments.16
- No interest is paid.17
- The primary amount you receive is tax-free, but generated income or interest may be subject to taxation.18 Consult a tax specialist for specific details.
- Be sure to obtain personalised quotes from independent, FCA-authorised, financial advisors.
Emotional and Psychological Considerations for Home Reversion
The emotional aspects are vital to consider alongside the financial implications.
Homes hold memories and emotional ties, making these kinds of decisions challenging.
Factors to consider include:
- Positive: Security
- Positive: Relief from financial stress
- Negative: Family and inheritance concerns
- Negative: Feelings of loss
- Negative: Anxiety about future changes
Seek professional advice and discuss with family to navigate these complexities effectively.
How Can You Secure the Best Deal on a Home Reversion Plan?
To get the best deal, you will usually have to shop around and get multiple quotes, though this is complicated by the fact that very few providers offer this type of plan in the UK.
Things to consider:
- Use a home reversion calculator to determine your affordability.
- Seek independent financial advice.
- Compare plans.
- Always choose a provider who is a member of the Equity Release Council and who is authorised and regulated in the UK by the FCA.
- Consider the plan's effect on your tax position and welfare benefits.
- Discuss your decision with your family.
What Is the Application Process for a Home Reversion Plan?
The application process usually involves a few key steps.
These steps generally involve:
- Consulting with a financial advisor to discuss your needs and circumstances
- Choosing a provider
- Getting a quote
- Getting a property valuation
- Completing the legal paperwork
Finally, after all checks are done and the paperwork is signed, the agreed cash is released.
What Are the Risks and Legal Aspects of Home Reversion Plans?
Understanding the risks and legalities is integral to making an informed choice.
The risks include:
- You may not receive the full market value for your property.
- You may not be able to release as much equity as you need.
- If you end the plan early, you may need to pay fees.
- You will not fully benefit from future property price rises.
- You may not be able to pass on your property to your heirs.
- You will no longer own 100% of your home.
- You will not be able to reclaim ownership of your property if your circumstances change.
- Home reversion could affect your tax position and entitlement to means-tested benefits.
- The property's deeds and ownership would be given to the provider.
- If you are a sole homeowner and die unexpectedly, your home may be lost.19
Always weigh these risks against the benefits with the help of a qualified equity release advisor or broker before making any decisions.
The legal considerations include:
- Ensuring you understand the terms of the agreement.
- Ensuring the agreement is correctly set up.
A solicitor will help you review the contract to ensure it meets your needs and expectations, and that you understand your rights and responsibilities as well as those of the provider.
If your provider goes bust, your rights are typically protected:
- Reputable providers are regulated by the Financial Conduct Authority (FCA)20, and plans are protected by the Financial Services Compensation Scheme.21
- Additionally, choosing a provider with Equity Release Council membership ensures that further safeguards are in place to protect you.
- If your provider goes out of business, your lifetime tenancy is protected.
How Does Home Reversion Compare to Other Equity Release Options?
Home reversion differs from other equity release options primarily because it involves selling a portion or all of your property to the provider in exchange for a lump sum or regular payments.
Unlike lifetime mortgages, there's no interest accumulating, as you're not taking out a loan.
This can make home reversion particularly appealing if you want to avoid the stress of growing interest and ensure a certain portion of your property's value is preserved for inheritance.
What Are the Alternatives to Home Reversion Plans?
Yes, there are alternatives, chiefly lifetime mortgages, Retirement Interest-Only (RIO) mortgages, and downsizing.
- A lifetime mortgage is an equity release scheme for homeowners aged 55 and over that allows them to borrow money against their property's value without making monthly repayments until they pass away or move into long-term care.
- A retirement interest-only (RIO) mortgage is like a regular interest-only mortgage for older borrowers, without a fixed end date. You pay monthly interest, and the loan's capital is repaid when your home is sold, typically after your passing or moving into long-term care.
- Downsizing is the process of selling your current residence and relocating to a less expensive, smaller home. It can help release equity and reduce living costs, making it attractive to retirees seeking a different location or a more manageable home.
Which Is Better Home Reversion or Lifetime Mortgage?
Home reversion and lifetime mortgage plans are part of the equity release umbrella. Here are the main differences between the two options:
- You can sell a portion (up to the entirety) of your property.
- Providers usually offer less than the current market value for the portion sold.
- Accessible to individuals aged 65 or over.
- No interest to pay on the plan.
- Advanced age or health issues may lead to a more favourable offer.
- You secure a loan against your property, typically ranging from 20% to 60% of its value.
- Available to individuals aged 55 or over.
- Interest is charged on the borrowed amount.
- Your age and health condition can influence the terms, including the interest rate offered.
How Does Home Reversion Equity Release Compare to Sale-and-Rent-Back Schemes?
Home reversion and sale-and-rent-back are two ways to release equity from your property.
The differences between these two types of plans:
- Home reversions: You sell part / all of your property, receive payments, and live there rent-free (in many cases) until you pass away or move.
- Sale-and-rent-back: You sell your property, rent it back, and can live there indefinitely, but rent may increase, and you run the risk of eviction.22
*Accurate as of 02/08/2023, but this may be subject to change.
How Safe Are Home Reversion Plans?
Plans are safe if you choose providers that are regulated by the Financial Conduct Authority, which ensures certain safeguards and standards are maintained.
It is also important to choose a provider that is a member of the Equity Release Council, ensuring they adhere to a strict code of conduct.
Frequently Asked Questions About Home Reversion Plans
Is Opting for a Home Reversion Plan Advisable?
Is Selling Your Home Possible With a Home Reversion Plan?
Can You Partially Sell Your Property Through a Home Reversion Plan?
Is Moving Out Feasible With a Home Reversion Plan?
Do You Retain Ownership With a Home Reversion Equity Release?
How Is the Property Value Linked to the Amount Received in a Home Reversion?
Can Home Reversion Plans Fund Care Expenses?
What Is Home Reversion in Equity Release?
How Does Home Reversion Work in the UK?
What Are the Pros and Cons of Home Reversion?
How Does Home Reversion Impact My Estate?
Is Home Reversion a Good Idea for Equity Release?
Concluding Insights on Home Reversion Plans in 2024
Home reversion schemes offer a unique way to unlock home equity without moving out, but it is essential to weigh their advantages and disadvantages and consider the potential financial, legal, emotional, and psychological implications.
Seek independent advice tailored to your situation and explore other options like lifetime mortgages and downsizing when considering home reversion to enhance your retirement security.
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