Home reversion is the oldest type of equity release scheme, and differs significantly from the other form of equity release schemes which are lifetime mortgages. It is the answer for consumers who do not want another mortgage on their home when they are in need of cash. Being property rich, but lacking in cash during retirement can mean ending retirement with a part time job, downsizing the home, selling precious items, or taking advantage of equity release products.
Home reversion involves a sale of the home in full, or part to an investment, or home reversion company. In exchange for selling part or the entire home, a homeowner receives a tax-free cash lump sum and remains living rent free for life in their property. This is down to the contractual terms agreed between both parties by the signing of a lifetime tenancy agreement which permits them living there for the rest of their lives.
Home reversion plans run until the last person has died or gone into long term care. Upon this event the reversion company will then sell the rest of the property and divide the proceeds from the sale into the correct proportions based on the homeowner and Reversion provider ownership split. This can be anywhere upto 100% of the overall value of the property.
How Home Reversion Plans Work
Homeowners have a choice in how much of the home they wish to sell. It should be based on retirement needs. A homeowner who needs a lot of tax free cash now may need to sell the entire home, whereas another homeowner may need a fixed amount to cover known expenditures such as home improvements, clear debts or help the children.
The full value of the home is not awarded to the homeowner, even if you sell 100% of the home. The provider is investing long term in the home resale. With 35 or more years left for the homeowner to remain in their property, it is a very long investment. For this reason depending on the age of the person anywhere from 20% to 50% is given to the homeowner during the process. The amount exchanged by the home reversion company will be heavily discounted because you will be living in the property rent free for the remainder of your life. Essentially, the younger you are, the less you will receive as a lump sum.
Age, property value, and the amount of the home to be sold will determine the percentage of loan to value provided to the homeowner. Selling 100% of the home, a person of 65 years of age may access 25% of its value. Someone 85 years old may be able to get closer to 50% of the loan to value. It does depend on the provider and the terms at the time of enquiry. The more value a home has the higher the maximum pay-out for the scheme.
The amount sold also determines the amount left for beneficiaries when the home is finally sold. If a homeowner does not sell the entire property it is possible for the beneficiaries to receive a portion based on market value less the percentage the investment companies keeps for their portion. Therefore if 40% of the property is sold by the home owner then they retain 60% of its final sale value. This is the major advantage of home reversion plans over lifetime mortgages.
Features of Home Reversion
• Sell part or entire home to suit the amount of tax free cash required.
• Live rent free for life by virtue of the lifetime tenancy agreement
• Inheritance guarantee for the beneficiaries of the unsold percentage
• Still retain any house price increase on the portion of the property not sold.
As stated above there are some features that characterise home reversion from lifetime mortgages. Lifetime mortgages have what the industry calls an inheritance guarantee. It is a clause in the loan contract to ensure the loan is not designed to increase even with interest beyond a set limit in order to keep a portion for homeowners’ beneficiaries.
Reversion works differently. It is not a clause in the contract, but a portion of the home the owner decides to hold back from the sale. As long as the homeowner does not sell another percentage of their home to release more equity, there will be inheritance for heirs. In this instance the control of this scheme is largely up to the homeowner.
Home Reversion Qualifications Required
Reversion schemes are only available to individuals 65 years and older. Most companies require the home value to be at least £75,000 and others may require more. The home must be in good condition and kept in that condition for home reversion to remain in place. Location can also be part of the qualifications based on resale value for the investment the reversion provider is making.