Home Reversion Plans Explained
A Home Reversion Scheme is a financial product that enables you to release money from your home by selling all or part of it to the Home Reversion provider in exchange for a cash lump sum or income.
How Much Can You Release With A Home Reversion Plan?
The amount of money you can release from your home will primarily based on the value of your property value and your age (or the ages of you and your spouse/partner if it is a joint application).
Home Reversion Plan Example
If your house is currently worth £400,000 and you agree with the provider of your Home Reversion Scheme to sell 50% of it then you would probably expect to receive £200,000. However, the figure you receive will depend on your age: you are likely to receive only a proportion of this figure.
The reason for this is the Home Reversion Scheme will have estimated how long you are likely to continue to live in your home before they can get their money back. The younger you are, the longer they will have to wait and, therefore, the lower the amount of money you will receive. Also, the provider will not offer you the full market value as they are allowing you to live in the property rent free for life.
The cost of your Home Reversion Scheme is known at outset because it is the difference between the amount you receive from the lender and your house’s market value of the percentage sold.
Suitability of Home Reversion Plans
Because of the way Home Reversion Plans work, they are most suited to people who do not intend to leave any money in their estate when they die. There is also the added benefit of being able to release money from your home without then need to make any monthly re-payments.
Here is a summary of the advantages and disadvantages of Home Reversion Plans:
Advantages of Home Reversion Plans
- No monthly repayments are needed so you do not have to budget accordingly.
- You do not have to move out of your home – you will have a guaranteed right to remain in it for as long as you want.
- You can continue to benefit from house price rises if you decide to take out a Home Reversion Plan which represents a small proportion of your house’s value. This means you will be able to leave an inheritance to pass on to your beneficiaries.
- Where inheritance tax (IHT) might be of concern, the value of the property sold to the provider will have to be deducted from your estate and can, therefore, help reduce any IHT liabilities.
Disadvantages of Home Reversion Plans
- Home Reversions Schemes are usually only available to applicants aged 65 or over.
- It is difficult and, in most cases, impossible to reverse a Home Reversion Scheme once it has been taken out.
- The structure of Home Reversions Plans means that, if you were to die in the early years of taking out the plan, the costs would be much greater than with a Lifetime Mortgage which is the most popular form of equity release.
- You will be responsible making sure your home is well maintained and you will have to bear the cost of any upkeep.
Useful Information About Equity Release
Options for providing income for people who are aged over 55 are becoming increasingly difficult. Most people rely on their personal pension or state pension to provide them with income and, until the Pension Freedom legislation was introduced in 2015, had to buy an annuity.
A recent article in the Consumer publication Which showed that, to produce an income equivalent to the average British salary of £26,000 per annum, would require a pension pot of more than £300,000. But the average size of a pension pot in the UK is around £35,000, so people are having to consider other ways of providing an income in their retirement years. Their options are limited because mortgage lenders consider the over-55s to be too old to take out a mortgage (unless it is a very short term).
These factors are likely to be the reason why equity release has increased in popularity in recent years. The boom in house prices combined with the legacy of the financial crisis, which resulted in a tightening of lending criteria, has meant that releasing money from property is an option that many people are considering to help them provide an income or a cash lump sum.
Conditions For Taking Out Equity Release
Taking out an Equity Release product like a Lifetime Mortgage or Home Reversion Plan is relatively straightforward and is regarded as being similar in complexity to a traditional mortgage. Here are some of the basic conditions that you must meet:
- There is minimum age to apply for this scheme which is usually 55 but can often be 60.
- The house which is the subject of the Equity Release plan must be owned by you and you should have no dependents living with you. In this context, a ‘Dependent’ means anyone under the age of 23 and is not likely to include your partner or spouse.
- There must be no outstanding mortgage left or, if there is a mortgage on your property, it must be very small in relation to the amount of equity remaining in your house.
- Your home must be in good condition and must be worth over a certain amount – typically £70,000.
Alternatives To With Equity Release
Generating an income from your home by exchanging or selling a percentage of it to an Equity Release company is big decision and should not be undertaken without considerable thought. Even though Equity Release products are regulated by the FCA, you may find that the amount of money that is finally paid on your loan is considerable in comparison to the amount of cash originally given to you so you should think carefully about other ways of obtaining an income that might prove to be less costly. For example, you should consider other options from which to derive a regular income such as savings, NISAs, investments, assets etc.
About Lifetime Mortgages
There are a number of different products designed to enable you to release money from your house. The scheme that is most popular is called a Lifetime Mortgage and it is suitable for those looking for a relatively straight forward way to borrow money against the equity that is in their house. The money you borrow will be repaid when you leave your house and move into care, or when you die.
Best Lifetime Mortgage For You
You can choose different types of Lifetime Mortgage according to your requirements:
Conventional Lifetime Mortgage
These popular products provide you with a cash sum in exchange for a share of the equity in your home. They are in the form of a loan but do not require monthly payments like a mortgage because the interest on your loan is rolled-up until the loan is repaid.
Some people like the idea that they don’t have to make regular monthly payments, but the debt that will need to be repaid will grow over time.
Interest Only Lifetime Mortgage
With an Interest Only Lifetime Mortgage you opt to pay the interest on your loan on a monthly basis so that the only repayment which will be made when your house is sold is the capital that was exchanged to provide your cash lump sum.
Flexible Drawdown Lifetime Mortgage
A Flexible Drawdown Lifetime Mortgage works in a similar way to a flexible drawdown pension: you will receive a cash lump sum that is secured against a proportion of your home but, instead of taking all the money in one go, you are able to withdraw money from the fund when you want. The advantage to this type of Lifetime Mortgage is that you only pay interest on the money that you have drawn-down, not on the whole amount of your loan.