What is a Home Reversion Plan?
Home reversion plans let you sell your home while continuing to live there rent-free. They are an equity release option for people aged over 60.
A home reversion plan is a form of equity release that allows you to access some of the wealth you have tied up in your home, also known as house equity. You sell all or a part of your home (for example, 50% of its value) to a provider. This will be at a discount to the market value of your property. In return, you receive either a tax-free cash lump sum, regular payments or both.
Although you no longer fully own your home, you and your partner have the right to remain there rent-free for the rest of your lives or until you pass away or move into care. You can continue to regard your home as your own without interference from the provider.
How does a home reversion plan work?
There are two types of equity release schemes: a home reversion plan and the more popular lifetime mortgage. Also known as a ‘lifetime lease’, a home reversion plan is available to people aged 60 and over who own their own home. You can only use these plans against your main residence.
Home reversion plans were the forerunners of lifetime mortgages. Their appeal has significantly declined as lifetime mortgages have become more flexible.
» COMPARE: Lifetime mortgage deals
Under a home reversion plan, you sell all or a part of your home in return for a cash lump sum, regular income or both. The income option offers you regular payments for as long as you live. However, if you die soon after taking out the plan, your beneficiaries will potentially lose a large sum of money for little benefit to you.
There are no monthly repayments to make, as no interest is payable on the money you receive.
The home reversion company receives its share of the proceeds when your home is eventually sold. So, if you sell all of the property to the company, it will get all of the proceeds. If you sell half of your residence, it will get half of the proceeds and you can leave the other half to your beneficiaries as an inheritance.
The more house prices rise, the more money the home reversion company will make, and the more you effectively pay to release the equity.
What to consider
Your share of the home will always remain the same whatever happens to its market value, unless you decide to take further cash releases.
You receive the money tax-free and can use it for whatever purpose you wish.
You could use the money to pay for your long-term care, but only if you stay in your home. Alternatively, you could, as an example, reinvest the money to generate extra income in retirement. Or, you could use it to cover major expenses such as private medical care, improvements to your home or simply enjoy a more comfortable retirement.
However, home reversion plans are considered high-risk products and for this reason, as with lifetime mortgages, you will need to seek legal and financial advice before you proceed.
Lenders will also expect you to maintain the property and keep it in good condition to protect your home’s resale value.
How much can I receive?
You can generally take between 30% and 60% of the market value of your house, depending on your age and health.
You don’t get the market rate for the share of your home you are selling because you don’t pay any interest on the money - it is the fee you pay for accessing the funds. The home reversion company doesn’t know when it will get its money back, nor what will happen to house prices.
The percentage you receive rises with age, so a home reversion plan is generally best suited to those aged over 70.
Although you won’t have to pay rent, you’ll still be liable for maintenance and other costs associated with the property, such as council tax and utility bills.
How do I get a home reversion plan?
There isn’t a huge choice of home reversion plan providers to choose from, however, to ensure you make the right choice, the Financial Conduct Authority (FCA) rules stipulate that you must consult a specialist adviser with an equity release qualification.
You’ll have to pay for legal advice, financial advice (unless you use a free advice service) as well as a valuation of your property and arrangement fees. These costs vary between providers.
Your adviser will discuss whether equity release is right for you and whether a home reversion or a lifetime mortgage is the best option. They can then recommend specific products.
» MORE: How to get equity release advice
Pros and cons of home reversion plans
- A home reversion plan allows you to withdraw some of the equity that’s stored in your home without having to move.
- You can withdraw tax-free cash and spend it how you like.
- There’s no interest to pay on the money and no monthly repayments
- You know the proportion of your home you can leave to your beneficiaries.
- You benefit from any increase in property prices if you retain a portion of the property.
- The older you are, the more money you’ll be able to release.
- You can generally release a larger proportion of your home’s value than you can via a lifetime mortgage.
- A home reversion plan is portable, meaning you may be able to move house in the future.
- Home reversion plans are regulated by the FCA, an official body with powers to protect your financial interests. You can complain to the Financial Ombudsman Service if you’re unhappy with the service you receive from an equity release provider.
- Having a large amount of cash in your bank account could impact your eligibility for pension credit, savings credit, council tax discount or other means-tested state benefits.
- A home reversion plan is not available to anyone aged under 60. By contrast, you can take out a lifetime mortgage from age 55.
- You won’t be paid the full market rate for the portion of your home you sell.
- Although most home reversion plans are portable, meaning you can transfer them to another home, in reality, you may face difficulties if the house you wish to move to is worth less than your current residence.
- If you sell all of your home, there’ll be nothing left for your beneficiaries to inherit.
Alternatives to home reversion plans
Traditional mortgages may offer a cheaper means of releasing cash from your home, although these are subject to age restrictions and older borrowers may struggle. Learn how to get a mortgage later in life.
A lifetime mortgage could potentially meet your needs better - enabling you to borrow against your home’s value without selling all or some of it to a home reversion company.
You could downsize, sell your current home and move to a cheaper alternative, releasing some of the current equity in your home.
» MORE: Alternatives to equity release
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Anthony is a BBC-trained journalist. He has worked in financial services and specialised in investments for over 20 years, writing for various wealth managers and leading news titles. Read more