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Equity Release: Home Reversion Plans

What are they - How they work


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Equity Release covers two types of loans -

This page will be looking in more detail at Home Reversion Schemes. What they are, how they work, buying tips and tactics, their advantages and perhaps more importantly their disadvantages.

Remember, with any financial product the real story, and often the key to getting a better understanding and price, is normally dependent on learning about their disadvantages first.
What are Home Reversion Schemes
A Home Reversion plan is where you sell your home or a percentage of it to a Reversion company but retain the rights to live in it rent-free for the rest of your life.

The money received can either be paid out in a cash lump sum, a monthly income, or a combination of the two.

The reversion company is unable to sell the property until both you and your spouse are dead or you decide to move into long term care. This means that you will not receive the full market value for your property as the Reversion company might have to wait 10, 20 or even 30 years before they can sell the property and make a profit.

  • The payouts range between about 20% - 60% of a property's value and depend on many factors, the main one being the age of you and your partner
  • The older you are the more of a percentage you'll receive and vice versa
  • This is common sense as collectively 65 year olds have a longer life expectancy than those aged 80.

The minimum qualifying age for Home Reversions are therefore higher than for Lifetime Mortgages.

How do they work
Under a Home Reversion scheme you sell the legal ownership to a Reversion company and become a tenant.

This is not a cause for concern because an iron clad legal document is signed, called a Lifetime Lease. This gives you the right to continue living in your property until you or your spouse dies (whoever lives the longest), or you have to move into long term care.

However, even though you are only the tenant you will still be responsible for upkeep of the property and all associated bills and outgoings relating to it.

How much can I expect to receive from my property

This depends mainly on your age and the age of your spouse if married.

The range is between about 20% and 60%. That means if your property is worth £100,000 and you sell 100% of it to a reversion company you'll receive between £30,000 - £60,000.

As pointed out in the introduction this is because the reversion company cannot sell the property while you still live there. It may then be many years before the company can turn a profit.

In effect a reversion company is paying a discounted price for an asset which it can only sell at some stage in the future.

Health is an important factor

The state of your health is an important factor when thinking about a home reversion scheme and so needs to be considered carefully.

For example, experts believe that about 40% of people who opt for home reversion could benefit via receiving a higher percentage on their property because of their medical condition(s). For example -

  • A 68 year old male who has had one heart attack and suffers from a non-life threatening kidney disease might be offered a lump sum of £180,000 on a property worth £300,000
  • That is 60% based on the assumption that 100% of the house has been sold to the reversion company
  • But if his medical conditions were certified the lump sum could be boosted by 10% or more
When it comes to Home Reversion schemes both old age and poor health are a benefit as more cash can be raised.
You don't need to sell all of your property

Many people use Home Reversion schemes to release only part of the property's value. For example, you can elect to sell 20%, 30%, 50% or the full 100%.

Selling 100% will obviously pay the most money but on your death there will be nothing left of the property's value to pass on to any beneficiaries.

But if you sell 25% and retain 75% ownership, this can be passed on to whoever you wish. Also, by selling only 25% you have the option to sell more of your property in the future.

This makes sense because as you get older the percentage you get paid of the current property's value will increase. For example, if you're presently 70 you'll probably receive around 40% of the market value. But if 75 this might increase to 45%.

A Home Reversion example

John's property is worth £100,000 -
  • He takes out a Home reversion plan and sells 50% to a reversion company
  • The company pays him £20,000 which is 40% of the value (of half the share, remember he only sold 50% of the property)
  • John dies 12 years later and the property is sold for £150,000
  • The proceeds are split, the reversion company gets its 50% share of £75,000 and John's heirs get the balance, also £75,000
As you can see the Reversion company's gross profit would be £55,000 (£75,000 - £20,000). If you do the maths that's about a 9% annualised yield which is not bad at all. But obviously the reversion company has costs to pay as well.
There is no interest charged

Interest is not charged with reversion schemes because they are neither loans or mortgages. Remember, the reversion company is buying part or all of a property for a discounted value based mainly on life expectancy.

In effect you're swapping an asset - your property - for a cash lump sum.

There is no standard Home Reversion scheme

There is no standard Reversion Scheme and so policies differ from provider to provider. As finance gets more advanced companies are continually offering new ideas and variations.

Competition has also increased over the last 5 years which is always good news for consumers as it normally leads to better prices.

It's therefore important to research what is available, checking out as many providers as you can. As ever, special attention should be placed on the total costs and charges along with the small print. See Secret 2 - Do your own research - it won't take long - which is one of this site's 10 Secrets to Good Personal Finance

Never forget that with personal finance products it is these details which can considerably influence the total cost.

Examples of different Home Reversion plans -

  • Some lenders won't pay a cash lump sum
  • Instead the money is used to buy an Annuity which in turn pays a monthly income for life
  • Others may give you the choice of having a lump sum and an income
  • Some companies won't allow you to sell 100% of your property, their limit might be 80%
Advantages - Home Reversion plans
  • No monthly payments to make - You won't have to pay a single penny of repayments

  • No interest to pay - A home reversion plan is not a loan, so there is no interest to pay. Other Equity Release plans such as Lifetime mortgages not only charge interest but this is compounded. This means that as interest is charged on interest the amount can grow extremely large over the years and in extreme cases can be more than the value of the property

  • You control what portion of the property is left to your beneficiaries - If you sell 50% of your property to a reversion company, you know that you retain control of the remaining 50% and can leave this to any beneficiary. However, if you take out a Lifetime mortgage any final percentage will not be known until you die

  • Benefit from an increase in property values - If the property market rises you get to share in this - unless you have sold its entire value

  • More cash can be released than with a Lifetime mortgage - Generally speaking more cash can be released with a reversion scheme than with lifetime mortgages

  • Can increase the percentage sold - For example if you initially sold 15% of your house you could sell another 10% or more at a later stage to generate extra cash

  • Bad health is an advantage - On one hand being in good health is an obvious advantage but for reversion schemes if your medical conditions are both serious and can be certified the Reversion company will probably pay you more, ie it will release say 40% of the property's value instead of 35%

  • Regulated by the FSA - Always good to have a financial product regulated and monitored by the financial regulator, the Financial Service Authority (FSA)
Disadvantages - Home Reversion plans
  • The most expensive option - according to research done by the financial services consumer panel, which advises the FSA, home reversion plans were found to be the most expensive option in almost all circumstances. To quote from their research -

'in most cases the odds clearly favoured selling up and downsizing although in some cases a lifetime mortgage did work out to be better value'

  • Won't receive full value for your home - The reversion company will only pay around 20% - 60% for the value of your property

  • Can't move home - Home reversions are not portable so if you want to move houses at a later stage your property must be sold and the reversion company will take its money. Lifetime mortgages however are generally portable

  • Early death - if you were to die soon after taking out a plan you have effectively sold a share or the full amount in your house on the cheap. However, some home reversion schemes give families a rebate should you die within the first few years of signing up

  • Your State benefits might be affected - Cash received from a Reversion scheme could seriously alter the amount of benefits or state support you're able to collect. It is critical to research this matter further with an adviser

  • Might increase the income tax you pay - Although the original cash is paid out tax-free if you use this money to generate an income further tax might have to be paid

  • Restrictions on your home - With some Reversion plans you will have to tell the company if your circumstances change. Perhaps you let a friend or lodger live with you. They might be forced to sign a document to waive their rights to live there should you die. Also, you might not be allowed to leave the property empty for more than 6 months

  • General upkeep expenses - You will be liable for general upkeep of the property. If this is not done to a satisfactory standard the reversion company might carry out the work and invoice you. Think hard about this if your property is old and is likely to require ongoing maintenance

  • Moving into long term care can cancel the contract - With some schemes if you have to move into long term care the contract is terminated and the house will be sold

  • Have to be over 65 - in most cases home reversion plans are available only to those aged 65+

  • Poor value for 'younger' pensioners - because of their increased life expectancy. For example a 65 year old might only receive 30% of the value of their property but in they were mid 70s this might rise to 45% or more

  • Selected properties only - the home reversion provider will prefer properties that are both in good condition and easy to sell. If your property is neither it might be hard to strike a deal

  • You become a tenant in your home - When you sign up you have to transfer legal ownership to the Reversion company although you are granted a lifetime lease which enables you to continue living there until you or your spouse dies, whoever lives the longer.
Where and how to buy - Buying tactics and tips

LearnMoney.co.uk Comment:
Home Reversion plans are normally best suited to -
  • People over the age of 65 (and preferably higher)
  • With no dependents or desire to leave their estate to anyone
  • Anyone who's looking to release the maximum amount of cash

Home reversion plans can also be used by people that want to leave a guaranteed inheritance. If you sell 50% of your property you can leave 50% to whoever you wish.

But are Reversion Plans any good

We know that they're generally expensive and often inflexible, so it is logical to suggest that at best this is an OK product. Most financial commentators (not I might add the ones who are selling and promoting them) would give them a 5 out of 10.

Equity Release, including Home reversion plans, should therefore be considered as a last resort for most home owners. Yes, they can play a role but downsizing your property looks to be a much better alternative.

Finally two important points to consider -

  1. The more research you do into home reversions, including paying special attention to how fees are charged, the better deal you will get. More importantly, there is less chance of signing up to the wrong type of plan for your needs

  2. Think hard about how you're going to use the money. If you spend it on holidays, cars, and other frivolous expenses and you live a long time - will there be any money left in your later years?

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