Home Reversion Plan
What is a home reversion plan and how do they work? We take a look at one half of equity release here with a clear example of how they work and much more. If you’re considering using equity release in later life, you’ll want to know more about home reversion plans!
What is equity release and how does it work?
Equity release is a way for older homeowners to borrow against their property and not have to make any monthly repayments. Using either a lifetime mortgage or home reversion scheme, they borrow against their home equity and only repay the debt when they die or move into care. The debt is paid through the money raised from the sale of their home in either situation.
Equity release can feel like a free tax-free lump sum, but it is important to remember that it is in fact a loan that will be repaid eventually – at a bigger cost.
Who can use equity release?
Equity release is only an option for senior homeowners who are at least 55 years old. All homeowners will need to meet this age requirement to qualify. Some equity release providers, such as Nationwide Bank, will require the homeowners to be below a certain age as well, often around 85 years old.
The homeowners must be releasing equity from their main residence and have no outstanding debt attached to the property, including a residential mortgage. You may be allowed to use equity release with a small existing mortgage as long as you agree to pay it off when you receive your cash lump sum.
The lender will assess the property to determine if they can give you an equity release scheme. This includes assessing building materials, design and risks, such as flooding.
Why do people use equity release?
The primary reason people decide to use an equity release scheme is to help fund their retirement or to increase their quality of later life. Some people may use some of their cash lump sum to go on holidays, complete home improvements, pay for private healthcare services or even give the money away to their loved ones.
What is the catch with equity release?
The “catch” with equity release is that both home reversion plans and lifetime mortgages can become extremely expensive to repay. No matter which equity release plan you choose, it is not uncommon to pay back twice the amount of your loan in the end.
This will ultimately mean you cannot pass on the property to family within your estate – unless they are willing to clear the debt with cash – and the value of the estate you pass on will be less. Choosing to use equity release becomes difficult when you have beneficiaries who will significantly benefit from your estate.
What is a lifetime mortgage?
As mentioned a lifetime mortgage is one of the two methods of equity release. A standard lifetime mortgage provides a cash lump sum that is charged with a fixed compounding interest rate. The homeowner does not make capital or interest loan repayments so the interest gets added to the debt each month, causing the total owed to keep growing until it is all repaid after death or moving into care.
For example, you may take out £65,000 of equity using a lifetime mortgage and be charged 6.4% interest. If you were to move into care after 12 years of having the lifetime mortgage, your home would be sold and almost £137,000 would be recovered from the sale money to clear your debt.
What is a home reversion plan?
The other type of equity release is home reversion plans. They are not as widely advertised and used in comparison to lifetime mortgages, but they are still an equity release option for seniors.
Home reversion plans allow homeowners to release up to 80% of their equity as a cash lump sum and do not charge any interest on the loan. Instead of applying interest to the loan, the home reversion company will request that they receive a greater percentage of the future sale proceeds from part of your home. So you receive a loan today with no repayments but have to pay back with a greater share of your home in the future.
Home reversion plan example
To understand how home reversion plans work, it is best to read an example.
Let’s imagine John is a single homeowner aged 58. He has no children so the decision to use an equity release plan to improve his quality for later life is an easier one. He decides to use a home reversion plan because he can access slightly more of his home equity than if he was to use a lifetime mortgage (this may not always be the case!).
He releases 45% equity from his £220,000 home giving him £99,000 tax-free cash. In exchange for this loan, the home reversion company have asked that he gives them 90% of his home’s future sale value to repay the debt. The home will only be sold after John moves into care or after he dies.
Sadly, John passes away 10 years later. By this time, the market value of his property has increased. The home’s market value is now £265,000 and the lender is still entitled to 90% of the sale value. So if the property does sell for £265,000, the lender would receive £238,500. The remaining £27,500 will remain part of John’s estate and be passed on to his estate beneficiaries.
What is a home reversion mortgage?
A home reversion mortgage is simply another name for home reversion plans. They work in the same way by allowing seniors to release equity without having to repay the debt until they die or move into long-term care.
What is a drawdown home reversion scheme?
A drawdown home reversion plan is a variation of a home reversion plan where the homeowner does not receive all of their loan at once. Instead, the homeowner receives a drawdown facility where they can access some of their tax-free cash in stages.
This can be beneficial if you want to budget your loan throughout the stages of retirement. And it may be a method to maintain entitlement to means-tested benefits.
What is the minimum age for a home reversion plan?
Equity release is exclusively available for people over 55 years old, and sometimes there may be an upper limit applied depending on the equity release company’s individual criteria.
However, many home reversion plans do require the homeowner, or homeowners, to be at least 65 years old. So you will have more options when taking out a home reversion plan the older you are.
Can you get a home reversion plan under 55?
You will not be able to get a home reversion plan if you are under 55 years old. Stick with us until the end of this guide for an alternative to equity release, which could also be used if you do not meet the equity release age requirement.
Or read our dedicated alternatives to equity release guide for under 55s.
Home reversion plan pros and cons
Just like any type of credit, there are pros and cons to using a home reversion plan. The main ones are:
- You receive a tax-free lump sum or a drawdown regular income
- You stay in your home rent-free
- You do not get charged interest
- You make no monthly payments
- You only repay when you die or move into long-term care
- The money can be spent as desired
- Just like any other equity release product, the total repayment is expensive and usually more than double the loan amount.
- The debt becomes instant and does not grow over time like a lifetime mortgage, thus increasing risk.
- By receiving a cash lump sum, you could become too wealthy to receive means-tested benefits.
- You will have to pay for financial advice and legal fees
- Getting out of a home reversion plan is expensive due to high early repayment charges
Are home reversion plans regulated?
Home reversion plans are regulated when you use a financial services company that is authorised and regulated by the Financial Conduct Authority. You should also use equity release companies that are members of the Equity Release Council.
How do I get a home reversion plan?
Home reversion plans are available from specific companies. These businesses may exclusively offer home reversion schemes and equity release products, or they may provide additional products, such as insurance. It is rare to find banks that offer equity release schemes, and those that do tend to stick to lifetime mortgages rather than reversion plans.
Get advice before applying for a home reversion scheme
Before you take out a home reversion plan you will need to access financial advice from an equity release specialist. This is to ensure you fully understand what type of agreement you are committing to, and to explore alternative options first.
Just how you should only use legitimate lenders, you should also only consider getting advice from financial service companies that are authorised and regulated by the Financial Conduct Authority – and those that are members of the Equity Release Council.
Alternatives to home reversion plans
If you are seeking an alternative to equity release – either because you have decided it is not for you or because you do not qualify – one option is to downsize your home to a smaller property. This would mean selling your current home and buying a less-valuable one to create some capital that could be used in retirement.
Always remember that there are additional fees and stresses to consider when moving home, so it is not as simple as selling your home at full market value and buying another less than that value.