Home reversion plans explained

A home reversion plan is a form of equity release that enables you to sell all or part of your home in return for cash in retirement. 

This guide explains all you need to know about how home reversion plans work, the pros and cons of using such a scheme and whether it’s the right choice for you. 

What is a reverse mortgage?

A ‘reverse mortgage’ is another term for a home reversion plan. It lets you sell all or part of your home in exchange for a tax-free cash lump sum, a regular income, or both. You can stay living in your property rent-free for the rest of your life or until you go into long-term care. 

How do home reversion plans work? 

Home reversion plans work by letting you access some of the value, or equity, that has built up in your property. 

To do this, you will need to sell all or a portion of your property to a home reversion plan provider at less than its market value. In return, you will receive a cash lump sum or a regular income, or both if you prefer. 

You will be allowed to remain in your home as a rent-free tenant, with no monthly payments to make.

When you die or move into long-term care, your home will be sold, and the reversion provider will get their share of the proceeds of the sale. This means that if, for example, you sold half of your property, the reversion provider would get 50% of the proceeds, while the remaining 50% would be put towards your inheritance.

If, on the other hand, you had sold the whole property to the reversion company, they would get 100% of the proceeds of the sale.  

How much cash could you release?

How much you receive through a home reversion plan will depend on your age and your health and lifestyle. Based on life expectancy, the older you are, the closer to your home’s market value you will receive. 

As a general rule, you’ll get around 25% of the market value of your home if you’re as young as 65, while you could get as much as 60% of the market value if you’re 90 and therefore less likely to be in your home for long. 

What are the different home reversion options?

You will need to decide whether you would prefer to take a cash lump sum, or a regular income, or a bit of both.

If you choose a lump sum, you can spend the money how you wish, but you may find your funds start to run out if you live to an old age. 

Choosing a regular income means you will receive regular payments throughout the rest of your life, so you won’t need to worry about funds drying up. On the flipside, however, this means if you die soon after choosing the plan, you will only have benefited from a few payments. 

For this reason, many people prefer to choose a combination of both cash and a regular income.

Who qualifies for a home reversion plan?

To be eligible for a home reversion plan you will need to be aged 65 or over, but generally this type of scheme is best suited to those over the age of 70. In addition:

  • You must own your own home 

  • You must be a UK resident

  • Your property must be your main residence

  • Your property will need to be worth a minimum amount, say £80,000

What are the pros and cons of home reversion plans? 

Before you decide whether a home reversion plan is a suitable option for you, it’s important to weigh up the pros and cons. Take a look at the following to help you make your decision:

Pros

  • No monthly payments: you won’t need to pay a regular sum each month or pay interest

  • You get a tax-free lump sum or income: this will enable you to pay for care and living costs or anything else you need

  • You can leave an inheritance: if you only sell part of your property, you’ll know exactly how much can be passed on as inheritance

  • You can stay in your home: you can continue to live at home until you die or move into care

  • You may benefit from house price changes: if you keep a percentage of your property, you’ll benefit from rising house prices on that portion. You will also be protected against falling prices on the percentage you sold

Cons

  • You may lose means-tested benefits: money released through a home reversion plan could affect your ability to claim means-tested benefits – those that are awarded based on your income and how much capital you have, such as council tax support, pension credit and the Cold Weather Payment

  • You will receive less than the market value for your home: even if you choose to sell 100% of your home, you won’t receive 100% of the current market value for it

  • You may lose out if house prices rise: you won’t benefit from future price rises on the portion of the property you have sold

  • Reduced inheritance: the amount you can pass on to your beneficiaries will be reduced, particularly if you sell all of your property

  • You no longer own 100% of your home

  • It’s expensive if you change your mind: should you want to buy back the portion of the property you sold, you will pay the current full market value which could be much more than you sold it for

  • Can be poor value: if you die or move into care soon after taking out the plan, you will have sold all or part of your home for considerably less than it was worth

  • You may not be able to move: should you decide to move home, not all home reversion plans are ‘portable’. You may also have to ask your provider’s permission if you want someone else, such as a partner or carer, to move into your home

What are the costs of a reverse mortgage? 

When taking out a home reversion plan, you’ll come across a number of costs you’ll need to pay, such as:

  • Application fee: your provider may charge a fee to process the application

  • Valuation fee: a valuation of your property will need to be carried out to assess how much your property is worth and how much cash can be released 

  • Legal fees: to cover fees for a solicitor or conveyancer. It is best to pay for a solicitor appointed by you to check the terms of the lease

  • Buildings insurance: most providers will ask that you have this in place before accepting your application

  • Advice fee: if you have sought independent financial advice

Home reversion companies will also expect you to keep your home in good condition, so it’s best to put some funds aside to help cover any maintenance costs. You will also still need to keep up with your utility bill payments and council tax.

Home reversion plan vs lifetime mortgage

Another form of equity release is a lifetime mortgage, which allows you to borrow money secured against your home. The loan is repaid when you die or move into long-term care and your property is sold. 

There are a number of similarities between lifetime mortgages and home reversion plans:

  • Both allow you to continue living in your home until you die or move into care

  • Both can provide a tax-free lump sum which you can spend how you see fit (although home reversion plans also allow you to take a regular income)

  • Both may affect your entitlement to means-tested benefits

  • Both may reduce the amount you can pass on as inheritance

However, there also are several key differences between the two options: 

  • With a lifetime mortgage you remain the sole owner of your home, whereas with a home reversion plan, you agree to sell some or all of it

  • Depending on the type of lifetime mortgage you choose, you may have to make regular interest payments on your loan, or you can pay the interest when your home is sold. With a home reversion plan, you do not make any regular payments and no interest is charged

  • To qualify for a lifetime mortgage, you will need to be at least 55, whereas home reversion plans have a minimum age of 65

  • With a lifetime mortgage, you can repay your loan early, although you may have to pay an early repayment charge. With home reversion plans, you may be able to buy back the share of your property, but this will be at the full market value

Is a home reversion plan right for you?

Equity release options such as home reversion plans are not suitable for everyone. To work out whether it might be the right choice for you, it’s important to consider whether you would lose your entitlement to benefits such as pension credit and council tax support, and whether your family would receive a significantly reduced inheritance. 

Make sure you weigh up how much a home reversion scheme would cost you, and always read the small print carefully to ensure you know exactly what you’re agreeing to. It’s also a good idea to speak to an independent financial adviser and consider other options before making your final decision. 

Note that home reversion plans are regulated by the Financial Conduct Authority (FCA) which means companies selling these plans must meet certain standards and follow set complaints procedures. 

Reputable equity release providers will also be a member of the Equity Release Council. This is an industry body that sets certain rules for members to follow.  

What are the alternatives? 

If you are not sure a home reversion plan is right for you and you would prefer to avoid equity release altogether, there are other options to consider:

Downsizing

Downsizing to a smaller, cheaper property can free up funds and still allow you to own your own home. It can be a good option if your children have left home and you feel your existing property is now too big, or if it requires a lot of maintenance or is expensive to run. 

The drawback, however, is that moving home can be expensive as there will be estate agent fees, legal fees, stamp duty and other moving costs to consider.

Borrowing funds

Depending on how much you need, you could consider borrowing through a personal loan or a credit card. Many personal loans offer competitive interest rates and some credit cards allow you to borrow interest-free for a number of months. 

However, it’s important to check you can afford the monthly repayments and have a plan in place to pay off the debt in time. If you’re borrowing on an interest-free credit card, make sure you clear your balance before the 0% deal ends and interest is charged. 


10th October 2020