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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 has the express purpose of releasing a lump sum or a regular income stream from the value of your property by selling a portion of it.

With a home reversion plan, rather than borrowing money from an equity release provider, you sell a portion of your property.

It is not a loan, it's a sale to the home reversion provider to release all or a portion of your money that is tied up on your property (the equity). In exchange, you’ll receive a tax-free lump sum or a guaranteed regular income.

The lender will get their money back when the property is sold, whether that is when you pass away or move into long-term care.

A home reversion plan is typically for those later in life and likely looking to cover their care costs.

To qualify for a home reversion plan you need to be over 65 with at least 50% of your mortgage paid off.

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?

With a whole reversion, you sell all the property to the provider, becoming a lifetime tenant of your own property.

You may still own a part of your property if you’ve done a partial reversion.

However, in practice, as far as you the occupier is concerned, nothing much has changed. You
will still live in the property rent-free for life or when you move to long-term care.

Further reading: Lifetime mortgage guide
Equity release guide

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Whole reversion vs partial reversion

The two main types of a home reversion plan are:

- Whole reversion
- Partial reversion

With a whole reversion, you sell all of your property to an equity release provider.

Alternatively, you can opt for a partial reversion where you sell part of your property to the provider.

In order to gain something out of the whole reversion or partial reversion, your home reversion provider won’t buy your home at the current market rate. It is very important to understand that you are selling either part or all of your property to the provider at a reduced price. The difference between the market value and your reduced selling price is effectively the provider’s profit on this deal.

For example:

If your home is worth £400,000 and you want to release £40,000, which is 10% of the value, you may have to give away in excess of 50% of the value of the property. Effectively giving away £200k in equity (rates will vary as this is just a working example). Even if the house price increases, the percentage of your home the lender will own will still remain, so they will also benefit from the increase in value.

The reason why this is such a high amount of equity in comparison to the loan amount is that the lender does not receive anything for potentially quite a long time.

What does a home reversion plan cost?

The fees involved in a home reversion plan are:

• Property maintenance fee.
• An arrangement fee to the home reversion plan provider.
• An advice fee payable to the financial adviser who will help you set up the home reversion plan.
• Property valuation fee to determine how much your property is worth in the market.
• Legal fee payable to the solicitor appointed by you to inspect the terms of the home reversion plan.

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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