Home reversion was the traditional way of releasing equity from your property, albeit the number of home reversion plans taken up is now less than 2% of all equity release cases taken out.
Reversion plans on your home involve selling part, or all of the title of your property for a tax-free cash lump sum. In return for the cash lump sum, the reversion company provides a lifetime tenancy, meaning the homeowner(s) can remain in the property for the rest of their life.
The major advantage of home reversion schemes is the guaranteed inheritance they provide to the beneficiaries. This is down to the fact that the unsold percentage which the homeowner retains, will be maintained throughout the home reversion schemes lifetime. Therefore, if 60% of the property is sold during their lifetime, then 40% will be guaranteed to pass onto the beneficiaries.
Do I Qualify for a Home Reversion Scheme?
All home reversion schemes commence at 65, which is significantly many years more than its competitor – the lifetime mortgage. It is a condition that you must own your own residence, which should ideally be mortgage free. If not, then the secured debt must be repaid either via the release of equity from the reversion plan, or from one’s own resources, if available.
The property should ideally be in a good state of repair & standard construction, however check first with your equity release adviser, if not. The minimum property value acceptable is £75,000 with a minimum release of £25,000.
The older the applicants, the more favourable the terms offered by the home reversion companies. Also, another benefit of home reversions is that where part of the property remains unsold, any escalation in the property value will be retained by the homeowner. Finally, even though property is owned by both parties, it is the retirees responsibility for the upkeep & maintenance of the house.
How much cash could home reversion schemes provide?
The formula for the home reversion calculation is based an age, sex and property valuation. The amount exchanged by the reversion company is heavily discounted. The reason for this is down to the fact that no rent is paid whilst you retain residence in the property which you only partly own. Conversely, the closer to 65 you are, the lower the equity released will be.
For comparison, a 65-year-old male who plans on selling 100% of his property, will receive around 35% of the valuation as a tax-free lump sum. However, an 80-year-old male in the same property would receive almost 56% of the valuation.
Therefore, the older you are when applying for an equity release home reversion scheme, the greater the lump sum will be. The rationale behind this is that life expectancy will be shorter for someone aged 80, than at 65. Therefore, the reversion provider on average will be receiving their funds back in a shorter timescale for the older person & can therefore afford to lend them more.
Before entering into any equity release scheme arrangement, it is the duty of your financial adviser to discuss both lifetime mortgage & home reversion schemes. This will involve weighing up the pros & cons of both plans, in order that an informed decision can be made around suitability and attitude to risk.
Home reversion scheme pros
- A portion of your home can be guaranteed as an inheritance for your estate.
- You receive a lifetime tenancy arrangement, meaning you have the right to remain in the property for the rest of your life.
- Home reversions do not charge any interest or require any monthly payments. Instead the providers take their cash profit by incorporating these costs into the reversion calculation.
- When the market remains stagnant, or falling the home reversion scheme becomes more favourable than a lifetime mortgage.
- With a remaining unsold percentage in the property, it will leave the potential for future additional borrowing.
- Set up costs for a reversion mortgage tend to be lower than a lifetime mortgage, usually with no application fee, or valuation as these are borne within the discounted percentage.
- There is the option of an early vacancy option should death occur within the earlier years of the plan.
Home reversion scheme cons
- With a minimum age of 65, home reversion applicants need to wait a further 10 years than a lifetime mortgage.
- Due to the discounted formula, home reversioners will not receive 100% of the value of the property .
- Limited (or no) escalation in the property value will be retained by the tenant. This will be on the portion NOT sold to the home reversion company
- Many people decline the opportunity of a home reversion due to the unease with regards to not owning 100% of your own property.
- Should you die in the early years of the scheme, a home reversion would represent poor value for money.
- Equity Release Council statistics show that less than 2% of all equity release schemes are now written on a home reversion basis
- With lifetime mortgages now having an inheritance protection option, they can match the main advantage of home reversions, which is to guarantee a specific inheritance from the property.
Which companies offer home reversion plans?
The number of home reversion providers has dwindled over the years with Aviva having pulled out of the market a few years back. The main two specialists are Bridgewater and Hodge Lifetime, who have been providing reversion schemes for over a decade. The newest entrant to the home reversion market is newlife with their Optimum Plan.
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These are home reversion schemes. To understand their features & risks involved, always ask for a Key Facts Illustration.