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Home Reversion Plans | What You Should Know
One of the equity release tools available to homeowners aged 65 and older is the home reversion plan, an arrangement where a portion of the house is sold but you retain the right to live in it until your death.
But how does a home reversion plan work and is it better than other types of equity release? At Clifton Private Finance, we have the answer.
To speak to an adviser at any point, please book a free consultation below with one of our experts.
Equity Release Explained
The idea of equity release is fairly simple: you have spent years paying off the mortgage and now you own your home, but it just feels like a lot of money locked into a property - and you want to live in it, so you don’t want to sell.
Is there a way to leverage the property to get some money to help your life today?
That’s exactly what equity release is - obtaining money today by promising part of the sale of your property later. You can use that money right now to do the things you want, whether that’s home improvements, helping out family, or jetting off to the North Pole to do that polar bear experience you’ve always dreamed of.
Equity release comes in two main forms: a lifetime mortgage, also called an equity release mortgage, and a home reversion plan. They’re slightly different in the way they work, even if they are both trying to achieve the same goal.
The Difference Between Lifetime Mortgages and Home Reversion Plans
There is a key difference between a lifetime mortgage and a home reversion plan:
- Lifetime Mortgage is a loan that is leveraged against your home.
- Home Reversion Plan is selling a portion of your home while you still live in it.
Neither option needs you to pay back any money, with the finances being sorted out after you pass away or move out of the home into full-time residential care.
Many people worry about lifetime mortgages due to the interest that is generated on the loan while you live in the house.
Naysayers argue that if you live a long time after taking out the mortgage, that interest will add up and add up and may even exceed the value of the house itself. That can feel very scary indeed!
But the truth is a little different.
Yes, interest will continue to accrue throughout your lifetime, and yes, it can become quite significant, but the no negative equity guarantee that’s part of all accredited lifetime mortgages means that it can never exceed the value of the property.
But is a home reversion plan better as it doesn’t accrue any interest?
Understanding a Home Reversion Plan
It’s true. A home reversion plan simplifies everything by not having interest build up as the years go on, but then how does it work? In short, how is the home reversion provider making their profit?
The key is in two factors:
- The expected return as house prices rise.
- The discounted price for which they purchase a part of your home.
How The Rise of House Prices Help Home Reversion Providers
We all understand the idea that house prices rise. On average, you can expect your home to increase in value by approximately 20% every ten years or so. That means if you own a property worth £250,000 today, it’ll be worth £300,000 in ten years.
For the home reversion provider, that’s some good news. If they buy half your property off you and the plan comes to fruition in ten years, they’ve made £25,000 (half of the £50,000 increase in our example).
It’s a good core benefit for them, but is it enough? After all, what if you pass away a year after taking out the plan? They’re making a relatively low couple of thousand pounds - and even that’s a bit of a gamble.
The Price of Selling on a Home Reversion Plan
The answer is obvious - don’t pay market value for the share. And this is what home reversion plans do. In fact, the amount offered is typically between 20% and 60% of the current market value, depending on your age.
Home Reversion Plan Example
Let’s look at an example, assuming a 40% valued home reversion plan:
Sarah has a house worth £250,000 and is looking for a home reversion plan to release equity. She is hoping to get £50,000 to help out her grandson, have a nice holiday-of-a-lifetime with her family and leave some in the bank to top up her pension.
She finds a home reversion provider willing to offer her 40% on market value.
Sarah enjoys her holiday, and her grandson gets through university with her help. She also is relaxed with some money in the bank for the next few years of her life.
Sadly, Sarah’s health declines and she has to move into full-time residential care 13 years later.
At that time, the home must be sold to match the commitments of the home reversion plan.
Sarah’s house has increased in value and is sold for £312,000. The home reversion plan provider owns half the house, so takes £156,000 and Sarah has £156,000 herself to pay for her ongoing care and put into her estate for her heirs.
The Numbers in Detail
Sarah effectively received £206,000 for her home. She had £50,000 early so that she could relax and enjoy her retirement years (as well as helping her grandson), plus £156,000 once she left her home.
This is compared to £312,000 that she would have received upon the sale of her house had she done nothing. It can be seen that in terms of real money, Sarah lost £106,000 through the home reversion plan.
The home reversion provider made a significant amount of money for their investment. They invested £50,000 and 13 years later recouped £156,000. An increase of £106,000.
The arrangement has actually been of benefit for everyone.
Even Sarah’s grandson, who would have been the main heir and been the beneficiary of that additional £106,000, was able to have a far better life and career thanks to the university degree he obtained thanks to his grandmother’s help.
Whether a home reversion plan is right for you or not really depends on the value you attribute to releasing cash from your property and losing out on its full potential value.
Home Reversion Plan Pros and Cons
Pros
- Powerful equity release that provides money for today’s needs.
- Payment available as a lump sum or monthly income to top up pension.
- No interest accrued that cuts into inheritance.
- No ongoing repayments required.
Cons
Home Reversion Plans vs. Lifetime Mortgage
One of the considerations that homeowners looking at equity release have to make is which is best for them - a home reversion plan, or a lifetime mortgage?
It’s hard to say because ultimately it’s about time, your individual circumstances and general preferences.
Crunching the numbers and understanding the finer complexities of equity release requires a specialist - and that’s why we at Clifton Private Finance have a dedicated equity release service to help you.
An adviser can work with you to look at the pros and cons of the various equity release options and help you choose the one that is best for you and your family.
Contact us today to learn more about equity release and home reversion plans.
