A Home Reversion Plan is A Type of Equity Release Which Can be Used to Unlock Cash From Your Home
A Home Reversion Plan is A Type of Equity Release Which Can be Used to Unlock Cash From Your Home
Home reversion plans in the UK are schemes where you sell a part or all of your home in exchange for a lifetime lease which allows you to remain your home for the rest of your life.
The reversion company that buys a part or all of your home pays you a lump sum payment. When you die, it gets the full realisable value of the proportion you sold, and the rest goes to your estate.
The amount that the reversion company pays you depends on how old you are, your current health and life expectancy. If you are currently in poor health and your life expectancy is short, you may be able to get a better deal from this scheme.
The terms of the home reversion plan will allow you to stay rent free in your home as a tenant for the rest of your life. However, you are still responsible for all the repairs and maintenance to the property.
As an example, assuming that your home is worth 250,000, and you and your spouse are in your mid-seventies. You decide to sell 50% of your home to an equity release mortgage provider. The mortgage provider is not going to pay you 125,000 for the 50% you are selling because you and your spouse will be staying in your home for the rest of your lives. They may pay you a discounted lump sum payment of, say, 70,000 for the 50% you are selling.
Then, let's say that when the property is eventually sold for 400,000, they will claim 50% of the sale value, i.e. 200,000.
If there is a boom in the property market, the mortgage provider will profit substantially from the home reversion plan. In the above example, they would have made a substantial profit of 130,000 (200,000 - 70,000).
However, if there is a slump in the property market resulting in negative equity of your property, they will lose from the home reversion plan if the value of the property falls below 140,000. Their 50% share would be worth less than the 70,000 they originally paid.
The advantage of home reversion plans over lifetime mortgages is that you know how much inheritance you will be leaving to your children or beneficiaries. In the above example, it is 50% of the value of the property when it is eventually sold.
In the case of lifetime mortgages, the mortgage providers get what is owed to them first (i.e. capital and accumulated compound interests) before your children or beneficiaries get anything from the property.
Equity release, whether in the form of lifetime mortgages or home reversion plans, is a serious commitment. It is advisable to get your family involved to discuss other financial alternatives before you seek independent specialist advice. Once you are committed to the plan, it is expensive to terminate it.
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