Home reversion plans are, in essence, a means of selling a share in your property to an investor, in exchange for payment. There are no repayments, with the investor receiving their share of proceeds when the property is eventually sold.
In effect, this is a straightforward investment by a lender.
Of the numerous equity release schemes available, it is the home reversion plan which has attracted more than its fair share of controversy in the past.
Thankfully the industry is more transparent and any misunderstandings of years gone by have now been rectified.
As this sector continues to grow, we can expect further regulations and consumer protections.
Continue reading to all the nitty-gritty details of home reversion plans.
What Is a Home Reversion Plan?
A home reversion plan is a very simple means of raising equity from your home and very often an alternative to a traditional mortgage. In exchange for payment, the homeowner will sell a percentage of their property to a home reversion company.
The home reversion company would retain their share in the property until the homeowner either dies or moves into full-time care. When the property is sold, they will receive a share of proceeds based on their share of the property.
What Is the Downside to a Home Reversion Plan?
The main downside to a home reversion plan is the fact that the proceeds received in exchange for selling a share of your property will be less than the market rate.
This could be between 20% and 50% of the actual market value. While we do need to take into account the free accommodation enjoyed by the homeowner, and the carrying cost of the investment, many people will be surprised at the significant discount paid compared to the market value.
Would I Pay Rent on My Property?
One of the benefits of a home reversion plan is the fact that the borrower will pay no rent on the property while they live there. There is also a cost to this provision which is one of the reasons why home reversion companies use such a heavy discounted market value when acquiring a share of a home.
For example, if you take out a home reversion plan aged 55, there is every chance that you could live to 85, 90 or 95 and above. Therefore, the theoretical loss in rental income could be quite substantial as their investment in your home is non-income producing – the return is based on capital appreciation.
Is There a Minimum Age?
The majority of home reversion companies will have a minimum equity release age of 55 or in some cases, 65. Where there are two homeowners taking out a home reversion plan eligibility would be based around the younger of the two.
The reason for this minimum age is simple; the longer a homeowner lives, the greater the loss of potential rental income and carrying costs on the investment.
Remember, it is only when the property is sold in the event of death or a move into full-time care that the home reversion company receive a potential return on their investment.
What if the Value of My Property Falls?
The general trend for UK property has been upwards for many years, although there have been periods when the market has struggled. So, in theory, the longer the homeowner lives in the property, the greater the chance of an increase in the value.
However, on occasion, there may be a long-term reduction in the property value due to various changes in and around the area. Whether the property was to double or half in value, the home reversion company bought the stake in the property, and they will only receive the relevant percentage of proceeds.
Whether or not they make money or lose money is irrelevant and of no concern to the homeowner.
Can I Buy Back the Home Reversion Company’s Share in My Home?
The simple answer is yes. At any time you can buy back the share (or part share) that you sold in your home, but there is one problem, you will need to buy it back at the market value.
If we assume you sold a 50% share worth £50,000 at market value for just £25,000, the home reversion company has an immediate theoretical return of £25,000.
If the value of your property doubled, obviously you would benefit, but the share that you sold for £25,000 would be worth £100,000.
Can I Move With a Home Reversion Plan?
As a shareholder in your home, the home reversion company would need to approve any move. As a minimum, they would request a similar type and property value with acceptable long-term potential compared to the original property.
This is where it can get complicated, although in some circumstances it may offer the opportunity to downsize while paying off the home reversion company at the same time.
Are There Any Alternatives?
There are three main alternatives which are a remortgage, equity mortgage or lifetime mortgage. For older homeowners, the remortgage and equity mortgage options may not be applicable with many failing the affordability test.
Therefore, in reality, for older homeowners, the main alternative would be a lifetime mortgage which coincidentally does not require an affordability test.
A lifetime mortgage would not require an affordability test simply because there are no repayments to be made. Interest on the mortgage is rolled up until either the homeowner dies or moves into full-time care.
At this point, the property would be sold, the outstanding mortgage capital and interest repaid and any surplus returned to the homeowner/their estate.
Should I Take Financial Advice?
Whether looking at remortgages, equity mortgages, home reversion schemes or lifetime mortgages, it is recommended that you take professional financial advice.
These are often complex transactions which have numerous benefits but also potential downsides. As the industry grows, competition should improve rates and reduce the overall cost to homeowners.
In years gone by home reversion plans have tended to attract more than their share fair of controversy. Thankfully, the UK authorities in the shape of the Financial Conduct Authority have stepped forward to introduce regulations and greater transparency.
We have also seen a significant improvement in consumer protection which has encouraged more customers to come forward.
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.