A home reversion plan is a type of equity release that allows you to release money tied up in your home and allows you to remain an inhabitant of the property. Unlike a lifetime mortgage, taking out a home reversion means you do not retain ownership of your home.
Intrigued? Find out below as we delve into all things home reversion plan and how it may or may not benefit you in the long run.
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- What Is A Home Reversion Plan?
- How Does A Reversion Scheme Work?
- What Are The Benefits & Risks Of A Reversion Scheme?
- How Can Reversions Be Used For Property Investments?
- Is A Home Reversion Right For You?
What Is A Home Reversion Plan?
A home reversion plan or scheme is where you sell part or all of your home in return for a regular income or cash lump sum, and is owned by someone else. You can continue to live in the property until you die or move out, while paying no rent.
Usually a reversion plan is available to people 65 or over and is like becoming a tenant in your own home (rent-free).
What Other Types Of Equity Release Are There?
There are two main types of equity release; lifetime mortgages and home reversions. Although similar in some aspects like allowing you to release equity on your property for tax-free cash, they also differ significantly.
The main difference between home reversion and lifetime mortgages is that you sell the ownership of your home in a reversion. With a lifetime mortgage, you retain the ownership of the property until you die or move to long-term care.
Before you decide to use any form of equity release you should seek the counsel of a financial adviser or mortgage broker who will be able to inform you of the best route for you.
How Does A Reversion Scheme Work?
A company will either buy part of your home or all of it and in return you’ll receive an income or cash lump sum. You’ll usually get between 20% and 60% of the market value of your home depending on the circumstances because the buyer:
- Allows you to carry on living there, either rent free, for a fixed rent or a rent that will increase by a specified annual percentage.
- Cannot sell it until you die, move into care, or are permanently vacated.
The older you are when you start on a home reversion scheme, the higher the percentage you’ll get of the market value of your property.
You get the right to carry on living in the home under a lifetime lease. Some plans might require a monthly rental payment to allow a larger amount to be released so you should make sure you can afford this — the terms of the lease will differ depending on the reversion provider.
What Are The Benefits & Risks Of A Home Reversion?
There are a whole host of benefits and risks associated with home reversions which you will need to consider when researching how to release equity on your home.
What Are The Benefits Of A Reversion?
When you use a home reversion to release equity from your property you will receive interest free and tax free cash as either lifetime income or a cash sum.
Both lifetime mortgages and home reversions are both regulated by the financial conduct authority and the Equity Release Council which means that your equity will not end up in negative equity.
Depending on the plan and provider, your reversion should be a portable plan which will allow you to still move house and you can choose to pay back your loan or buy back your home at a later date.
If you need to pay for long-term care in the future, unlocking the equity on your home via a reversion may help fund any care costs before the state support kicks in.
What Are The Risks Of A Reversion Scheme?
A home reversion is seen as the more risky way of equity release in comparison to a lifetime mortgage as the likelihood of you receiving more than 30% of your home’s market value is highly unlikely.
The younger or better health you are when you apply for the reversion, the less of your home value you will receive.
A reversion could have a huge implication for your benefits, inheritance and your long-term financial planning. You should ensure you speak to a financial advisor and make sure you are not putting yourself at risk by using a home reversion scheme.
A home reversion can have an impact on certain means-tested benefits, which are calculated based on the amount of income or savings — any changes to these can impact your entitlement to benefits.
If you release equity and sell part or all of your estate then this can be counted as capital that will affect your entitlement to pension credit, council tax reduction and housing benefits.
As with a lifetime mortgage, a home reversion will greatly reduce your inheritance as you are selling part of your estate. Any beneficiaries you have in your will, will receive only part of what is left within your estate.
A reversion may negatively impact your financial future as it will limit future borrowing like if you wish to remortgage your property or sell it later in life.
You will not have full ownership of the property so if you ever did wish to sell you can not, the property would belong to your reversion lender.
How Much Does A Home Reversion Cost?
In order for you to take our a home reversion to release equity you will need to pay:
- Maintenance on the property.
- If applicable under the terms of your agreement, a monthly rental payment.
- An arrangement fee to the provider for the reversion.
- A fee to your financial advisor for setting up the scheme.
- Any valuation fees.
- Any legal fees.
How Can Home Reversions Be Used For Property Investments?
Home reversions can be used for property investment in many ways as it can allow someone to release equity on their property for a lump sum or regular income payments.
Homeowners can use the cash released from the reversion to invest into development projects, which could involve purchasing a property that needs refurbishment or renovation and then flipping it for a profit.
Alternatively they could use the funds to purchase land and build new properties for rental income or hold it and apply for planning permission and sell that onto a developer.
Landlords could use the cash released to invest in Buy-To-Let properties by purchasing a property with the intention to rent it out to tenants.
The rental income generated can provide a regular source of income which can be used to pay off any outstanding mortgage debt or fund their retirement.
Investors can use a reversion to provide diversification to their portfolio as they can reduce their overall portfolio risk and potentially increase their returns.
Historically, property investments have provided strong returns over the long term and have a low correlation with other asset classes such as stocks and bonds.
Is A Home Reversion Right For You?
Whether a home reversion is right for you will depend on your individual circumstances, financial goals and what financial advice you receive.
Reversion schemes can be a great way to release equity from your home to pay for living expenses, long-term care expenses, or other financial needs.
But, it’s important to carefully consider the amount of money you will receive from the sale of your property and whether it will be sufficient to meet your needs — selling your property and downsizing instead might be a more advantageous option.
If you are anticipating needing long-term care in the future, a home reversion may not be the best choice. The sale of your property could impact your eligibility for certain types of homecare and support and it may be difficult to find suitable accommodation.
Also, if you are looking to leave an inheritance to any of your loved ones in the future, then a home reversion may also not be the route for you as you are essentially giving up ownership of that portion of your estate.
When you pass away, there will be less value in your estate to distribute to your beneficiaries.
And that’s all folks! If you have any questions please feel free to contact us.