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Home reversion plan

A comprehensive guide on home reversion plans

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What is a home reversion plan?

A home reversion plan is a type of equity release scheme that allows homeowners, typically those who are retired or elderly, to access a portion of the value of their property while still retaining the right to live in the property until they pass away or move into long-term care. It's a financial arrangement commonly found in the United Kingdom and some other countries.Here's how a home reversion plan generally works:

Agreement: The homeowner sells a percentage of their property (usually between 20% and 60%) to a reversion company or investor in exchange for a lump sum of money, a regular income, or a combination of both.

Occupancy Rights: The homeowner retains a "lifetime lease" or "occupancy rights," which guarantees their right to live in the property without having to pay rent. This arrangement continues until they pass away or move into a care facility.

Repayment: The homeowner or their estate only repays the reversion company when the property is eventually sold, typically when the homeowner dies or moves into care. At that point, the reversion company receives their proportional share of the proceeds from the sale of the property.

Ownership: As the homeowner has sold a portion of their property, they will own a reduced share of the property's value. When the property is sold, the reversion company receives their share, and the homeowner (or their beneficiaries) receive the remaining share.

Home reversion plans can provide an immediate injection of funds for retirees who may be asset-rich but cash-poor, enabling them to cover living expenses, healthcare costs, or other financial needs. However, there are potential drawbacks to consider:

Reduced Inheritance: By selling a portion of the property, the homeowner's beneficiaries will receive a smaller inheritance when the property is eventually sold.

Limited Market Participation: Since a portion of the property's value is sold, the homeowner won't benefit fully from any potential increase in property value over time.

Complexity and Costs: Home reversion plans can be complex financial products with associated fees and costs. It's essential to fully understand the terms and conditions before entering into such an agreement.

As with any financial decision, it's crucial for individuals considering a home reversion plan to seek independent financial advice and carefully weigh the pros and cons to determine if this option aligns with their overall financial goals and circumstances.

Working with an Independent Qualified Advisor

Although the agreement is between you and the insurance underwriter, it's often common and beneficial to work with an Independent Qualified Advisor, who will act on your behalf to find the best deal on the market for your circumstance. The advisor will act as a bridge between you and the underwriters, so they will ask you the questions required by the underwriter to generate a quote. The advisor will be rewarded by getting a pay-out from the underwriter, often there would be no cost to you for the use of their service and you get the benefit of their access to the whole market, which won’t be accessible to you without them.

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How does ownership work in a home reversion?

In a home reversion plan, ownership of the property is shared between the homeowner and the reversion company or investor. Here's how ownership works in a home reversion arrangement:
1. Initial Sale: When a homeowner enters into a home reversion plan, they sell a percentage of the property to the reversion company or investor. This percentage is typically between 20% and 60%, but the exact amount can vary based on the agreement.
2. Ownership Split: After the sale, the homeowner retains ownership of the remaining percentage of the property. For example, if a homeowner sells 40% of their property through a home reversion plan, they will continue to own the remaining 60% (assuming the total ownership adds up to 100%).
3. Occupancy Rights: Despite selling a portion of the property, the homeowner retains the right to live in the property for the rest of their life or until they move into long-term care. This right is usually established through a lifetime lease or occupancy agreement.
4. Selling the Property: When the homeowner passes away or moves into care, the property is sold. The proceeds from the sale are then divided based on the ownership percentages. The reversion company receives the agreed-upon percentage that they purchased, and the homeowner's estate (or beneficiaries) receive the remaining percentage.

It's important to note that the actual division of proceeds and ownership percentages can vary based on the specific terms of the home reversion plan. The homeowner's share of the property's value at the time of sale will depend on the initial ownership split, any changes in property value over time, and the terms of the agreement.
Keep in mind that while a home reversion plan provides immediate funds or income for the homeowner, it also means that the potential for future appreciation in the property's value is shared with the reversion company. Additionally, the homeowner's beneficiaries will receive a reduced inheritance since a portion of the property's value has been sold.
Before entering into a home reversion plan, it's crucial to thoroughly understand the ownership structure, terms, and potential implications, and to seek independent financial advice to ensure the arrangement aligns with your financial goals and needs.

Further reading: Lifetime mortgage guide
Equity release guide

Steps to taking out a home reversion plan

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Important aspects of a home reversion plan

Home reversion plans generally come in a few variations, each with its own features and options. The main types of home reversion plans include:

Standard Home Reversion Plan: This is the most straightforward type of home reversion plan. You sell a portion of your property to the reversion company in exchange for a lump sum or regular payments. You retain the right to live in the property without rent until you pass away or move into long-term care. When the property is eventually sold, the reversion company receives its share of the sale proceeds.

Enhanced Home Reversion Plan: Some providers offer enhanced plans for individuals with certain health conditions or lifestyle factors that may shorten their life expectancy. Because the reversion company expects a shorter repayment period, they may offer a higher percentage of the property's value in exchange for the equity share.

Deferred Home Reversion Plan: In this type of plan, you sell a portion of your property but don't receive the lump sum or regular payments immediately. Instead, the payment is deferred until a later date, which could be triggered by a specific event such as your death, moving into long-term care, or reaching a certain age.

Stepped Home Reversion Plan: With a stepped plan, you can sell different percentages of your property at different times. For example, you might sell 20% initially and then sell an additional 10% at a later date. This could be beneficial if you want to release equity in stages.

Inheritance Protection Home Reversion Plan: Some plans offer an option to protect a portion of the property's value for your beneficiaries. This means that upon the eventual sale of the property, a certain percentage of the proceeds will go to your beneficiaries, regardless of the equity share you've sold.

Shared Appreciation Home Reversion Plan: This plan allows you to share in any future increase in the property's value. When the property is sold, you and the reversion company split the proceeds based on the initial ownership percentages. However, the reversion company's share might increase if the property's value has appreciated significantly.

It's important to note that the availability of these types of plans can vary based on the reversion provider and the regulations in your country. Before committing to any home reversion plan, it's crucial to thoroughly understand the terms, benefits, and potential drawbacks of the specific plan you're considering. Seek independent financial advice to ensure that the plan aligns with your financial goals and circumstances.

Whole reversion vs partial reversion

Whole reversion and partial reversion are two different approaches within the realm of home reversion plans. Let's explore the pros and cons of each:

Whole Reversion:

In a whole reversion plan, you sell the entire property to the reversion company in exchange for a lump sum or regular payments. You no longer have the right to live in the property, as ownership is transferred to the reversion company. Here are the pros and cons:

Pros:

Immediate Funds: You receive a substantial lump sum or regular payments, which can provide significant financial relief or help cover expenses.

No Ongoing Costs: Since you no longer own the property, you're relieved of responsibilities such as maintenance, property taxes, and insurance.

Simplified Arrangement: There's no need to worry about ownership percentages or sharing future property appreciation.

Cons:

Loss of Ownership: You lose ownership and the right to live in your property, which can be emotionally challenging, especially if you're attached to your home.

Reduced Inheritance: Your beneficiaries will not inherit the property, potentially impacting their inheritance.

Limited to No Residency: You'll need to find alternative housing, which may involve additional costs.

Partial Reversion:

In a partial reversion plan, you sell a portion of your property to the reversion company while retaining the right to live in the property. Here are the pros and cons:

Pros:

Equity Release: You can access a portion of your property's value while still enjoying the right to reside in your home.

Retain Ownership Stake: You keep ownership of the remaining portion of the property, which can offer a sense of security.

Shared Appreciation: Some plans allow you to benefit from future property appreciation in the portion you still own.

Cons:

Reduced Inheritance: Your beneficiaries will inherit a smaller share of the property's value, as a portion has been sold.

Complexity: Partial reversion plans can be more intricate, involving ownership percentages and potential future calculations.

Less Immediate Funding: The funds you receive might be less than with a whole reversion plan, which could impact your financial goals.

Ultimately, the decision between whole reversion and partial reversion depends on your financial needs, personal preferences, and long-term goals. Both options have their advantages and disadvantages, and it's essential to carefully consider how each aligns with your circumstances and objectives. Consulting with a qualified financial advisor can help you make an informed choice that suits your situation.

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What does a home reversion plan cost?

The costs associated with a home reversion plan can vary depending on several factors, including the reversion provider, the terms of the agreement, the value of your property, and the percentage of equity you're selling. It's important to thoroughly understand the costs before entering into a home reversion plan. Here are some potential costs to consider:
1. Percentage Sold: The larger the percentage of your property's equity you sell, the more you can expect the reversion company to pay you initially. However, this also means you'll retain a smaller ownership stake and your beneficiaries will inherit less.
2. Valuation Fees: The property will need to be valued by a professional surveyor to determine its current market value. You may need to cover the cost of this valuation.
3. Legal Fees: Legal fees are associated with setting up the home reversion plan and drafting the necessary agreements. These fees can vary depending on the complexity of the arrangement and the legal services required.
4. Arrangement Fees: Some reversion providers may charge an arrangement or application fee for setting up the plan. This fee covers administrative costs related to processing the plan.
5. Advisory Fees: If you seek advice from a financial advisor or intermediary, they may charge a fee for their services.
6. Maintenance and Insurance Costs: While you retain the right to live in the property, you may still be responsible for ongoing maintenance, property taxes, and insurance. Make sure you understand your obligations in this regard.
7. Potential Early Repayment Charges: Some home reversion plans may have penalties or charges if you decide to repay the plan early or terminate it before a certain period has elapsed.
8. Selling Costs: When the property is eventually sold, there will be costs associated with the sale process, including legal fees, estate agent fees, and potentially other costs related to conveyancing.
9. Interest and Capital Gains Sharing: While home reversion plans do not involve interest like some other equity release products, some plans may involve sharing a portion of future property appreciation with the reversion company. This could impact the final amount you or your beneficiaries receive upon the sale of the property.

It's important to carefully review the terms and conditions of the specific home reversion plan you are considering to understand all potential costs involved. Additionally, seeking independent financial advice can help you fully grasp the financial implications and ensure that you make an informed decision that aligns with your goals and circumstances.

What are the main advantages & disadvantages of a home reversion plan?

Advantages

• A home reversion plan is a great way to gain access to money to pay for later life including care costs.
• You won’t have to move out of the property to a care home if you don’t want to.
• You’ll benefit from the equity you have built up over the years.
• The money you take out with a home reversion plan is tax-free. You can use it for any purpose.
• You can avoid inheritance tax.
• With partial home reversion, you can fund your care and can even leave a percentage of your property as an inheritance to your loved ones.

Disadvantages

• Opting for a home reversion plan can have an impact on your entitlement to state benefits.
• You may not be the owner of the property if you sell it all. Therefore, in the case of a whole reversion, you can’t pass it on as an inheritance to your loved ones . In the case of a partial home reversion, you can leave the unsold portion as inheritance.
• If you decide to change your mind in the middle of a home reversion plan, you may suffer from a significant financial impact.
• You, as a homeowner, will bear legal andmortgage arrangementfees that are associated with a home reversion plan.
• You need permission from your equity release company if you decide to sell your home and move to another home.

Equity Release Council

The equity release council (ERC), launched in 2012, is a UK organisation that promotes safe equity release products and ensures to safeguard the interest of the homeowners who opt to take out equity release from different UK lenders. The ERC is supported by leading providers of equity release schemes and works with the UK government. Each member of the ERC council that offers equity release products, is bound by its comprehensive principles which aim to make the product safe for its consumers. ERC Statement of Principles The ERC statement of principles offers peace of mind to equity release companies and their consumers. The comprehensive principles mention that the members will:

Make sure that their actions promote confidence and awareness in equity release
Act at all times in good faith, with the best interest of consumers in mind, treating them fairly in all their actions
Ensure conflicts of interest are pointed out quickly and managed in all fairness
Deliver acceptable outcomes for consumers from the start of the equity release, through every point of contact during the life of the product

ERC Product Standards According to ERC, the equity release product standards are as follows.

Interest rates must be fixed for lifetime mortgages. A cap should be used for variable interest rates till the life of the product.
You have the right to stay in your home until you move into long-term care or you pass away.
The equity release product must have “No negative guarantee”. It means that when the property is sold, and the agent and solicitor fees have been paid, if the amount left is not enough to repay the outstanding loan, you won’t be liable for them.
You can move to a new property if the new property is acceptable by your equity release provider.

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Because we play by the book we want to tell you that...

1. We understand equity release isn’t for everyone, and we’ll never say it’s the right option for you, that’s why we pass you onto an Expert.

2. A lifetime mortgage is a loan secured against your property. With a lifetime mortgage there are typically no monthly repayments to make as the loan, plus roll up interest, is repaid when the plan comes to an end. Usually, that’s when you, or the last remaining applicant, either passes away or moves into long-term care.

3. With a lifetime mortgage you’ll still retain full ownership of your home.

4. Equity release will reduce the value of your estate and may affect your entitlement to means tested benefits.

5. Mortgage Advice Bureau Later Life offer lifetime mortgage products from a carefully selected panel of providers.

6. Unless you decide to go ahead, Mortgage Advice Bureau Later Life’s service is completely free of charge as their fixed advice fee of £1,295 would only be payable in completion of a plan.

7. ClearKey is an independent marketing website which only acts as an introducer to companies who offer advice on various financial plans, products and services.

8. Our partners are authorised and regulated by the Financial Conduct Authority.

9. ClearKey.co.uk are not authorised to give any advice and we are not liable for any financial advice provided by or obtained through a third party.

10. Life insurance products attract terms and conditions. Price information contained within this website are for illustration purposes only. You will receive a full policy document upon application which will set out the terms, conditions and limitations of cover provided under the plan.

11. Your home may be at risk if you do not keep up repayments. Think carefully about securing debt against your home. When consolidating existing borrowing be aware that extending the term could increase the amount repaid.