Home Reversion Scheme – What It Is and How You Do It
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A home reversion scheme might not be the most popular method of equity release for seniors, but it is worth looking into if you are considering releasing equity from your home. We discuss the basics of home reversion plans in this guide, including the pros and cons of home reversion plans in the UK and where you can get one.
What is equity release and who can use it?
Equity release is a type of borrowing available only to seniors who own their own property. It allows them to borrow against their home equity and make zero monthly repayments. The loan only gets repaid after the homeowner – or the last surviving homeowner in the case of joint ownership – either dies or moves into long-term care.
To get an equity release plan in the UK, the applicant will need to be at least 55 years old and be taking equity out of their main residence. It cannot be typically used on rental properties or holiday homes because the debt must be repaid when you stop living at the property where equity was released, as explained above.
The property must have a minimum market valuation at the time of application, which is set by each individual lender but usually around £80,000. The property must have no debt secured against it, including a residential mortgage. Sometimes people with an outstanding mortgage can use equity release to access money by must use some of their cash lump sum to clear their mortgage.
Lastly, even if you tick all the eligibility boxes, you can still be denied equity release. This may be due to the materials or methods used to your build your property, or due to flood risks.
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How many equity release products are there in the UK?
There are only two types of equity release products in the UK. These are a home reversion plan, also known as a home reversion scheme, and a lifetime mortgage. Both products work as described by not asking for any monthly loan repayments and only requiring the debt to be cleared after death or moving into long-term care.
We explain how both these equity release products work in detail later in this guide!
What does equity release get used for?
The money received from either type of equity release is usually used to fund retirement, or at least improve the quality of retirement and later life. This may include an array of purchases, including home improvements, private medical services, holidays and cruises and much more.
Or the money may be given to family members, often to help them get a foot on the property ladder. Just be aware that financial gifts to others can be subject to inheritance tax if they are given within seven years of death.
What is the catch with equity release?
There should be nothing about equity release that catches you out because you should have received sound financial advice prior to taking out a loan.
However, the catch of equity release is often considered to be the overall expense needed to pay off the loan in the end. No matter what type of equity release you take out, the amount you pay back can easily be more than double your initial loan amount.
Why is equity release a bad idea?
Equity release is not always a bad idea for everyone, but it can be a bad idea if there are better alternative solutions for your financial needs. In general, it may be considered a bad idea because the significant expense of repaying eats into the value of your estate when you die, reducing the wealth you pass on to loved ones.
This is why using a lifetime mortgage or home reversion plan is an easier decision if you have nobody of significance to leave your estate. Or the people who will benefit from your estate are already successful and wealthy. On the flip side, knowing some loved ones are relying on a sizeable inheritance from you can put you off using equity release.
What is a lifetime mortgage for over 60s?
A lifetime mortgage is the most used method of equity release and is available to anyone over 55 years old, although limited lenders may require you to be over 60 or 65. It provides you with a loan against your equity – as described – and charges your loan with interest.
This interest is also not repaid each month unless volunteered, and the interest gets added to the total debt. Therefore, the longer you have your lifetime mortgage the bigger the debt grows and the more money will need to be repaid from your eventual property sale.
What is a home reversion scheme?
A home reversion scheme, also called a home reversion plan, is the other type of equity release but is less commonly used than lifetime mortgages. The home reversion plan also provides a cash lump sum as tax-free cash that doesn’t have to be repaid until after death or moving into care – and it charges zero interest.
For the home reversion lender to make money on the loan, they request that a future part of your home sale proceeds be given to them to repay the debt. This percentage of your property’s future sale proceeds will be much larger than the loan you took out.
Read on for a clear and simplified example of how a home reversion plan works.
A simple example of a home reversion scheme
Let’s imagine Judith owns a £140,000 home with no existing mortgage. She is approaching retirement and wants to make life more comfortable. She decides to use a home reversion scheme after consulting with an equity release adviser who was authorised and regulated by the Financial Conduct Authority.
Judith releases 30% of her home equity as a tax-free lump sum, giving her £42,000. As part of the agreement, the home reversion company will take 70% of the future market value of her property when it is eventually sold, either after death or after moving into care.
Judith sadly passes away 15 years later. At this stage, the market value of her home has increased by £50,000, meaning it is now worth £190,000. The home reversion company is entitled to collect 70% of the property’s sale value to clear the debt. If the property sells for its market value, the reversion company will be entitled to £133,000 of the sale proceeds. So Judith’s initial £42,000 loan will end up costing £133,000 after she has passed away.
The pros and cons of a home reversion plan
There are benefits and drawbacks of using home reversion plans in the UK. We summarise the key points below:
- You can receive a cash lump sum or drawdown facility
- The money you receive is tax-free cash
- You continue living at home with no repayments to make
- The loan can be used for any purpose
- No interest is charged on the loan
- The cost to repay home reversion plans is excessive
- You will pass on less wealth to loved ones
- The money you receive could cease entitlement to means-tested benefits
- Getting out of home reversion plans is expensive due to hefty early repayment charges
Are home reversion plans regulated?
You should only ever consider a home reversion scheme from a company that is authorised and regulated by the Financial Conduct Authority. This will ensure the company you are dealing with is legitimate and allowed to offer these products in the UK. Additionally, it is best to only consider companies that are members of the Equity Release Council. This will provide homeowners with further protection and guarantees.
What is the minimum age for a home reversion plan?
The minimum age to get a home reversion scheme in the UK is 55. However, many companies that provide these loans require the youngest homeowner to be at least 65 years old. You will still be able to find these loans if you are 55, but you’ll usually have more options if you are older.
Using a home reversion plan to pay for your care
Paying for care home fees has become a hot topic in the UK in the post-pandemic world. The UK Government has recently increased National Insurance contributions to prevent people from having to sell their homes to pay for care, which may or may not have the success hoped for.
Some people decide to use equity release, including a home reversion scheme, to cover the cost of care. This may include the cost of having at-home care services from a private provider, or for one of the homeowners to pay care home fees while the other continues living at their property. Remember, the debt only has to be repaid when the last surviving homeowner dies or moves into care.
Where can you get a home reversion plan?
Home reversion schemes are available from select companies that offer these products, either exclusively or along with other financial products, such as insurance. Most high-street UK banks do not offer equity release, and the banks that do tend to stick to lifetime mortgages rather than home reversion schemes. You may find an exception to the rule.
Is a home reversion plan right for me?
The only way to know if a home reversion scheme is the right decision for you is to learn more about these equity release products and to get equity release advice from a trained professional.
You may want to consider alternative options to fund your retirement, such as downsizing.
Where to find equity release advice services
You should always get financial advice before applying for any equity release loan. This is so you 100% understand how they work and the implications of agreeing to the credit agreement. Getting out of a home reversion scheme is almost impossible without eye-watering early repayment costs to pay. You will also require legal services from suitable law firms with more than four active lawyers. Your smaller local firm might not qualify to help you with equity release.
We have created a MoneyNerd guide helping people across the UK to locate reputable equity release advisers. Read it here!
Is a home reversion plan better than a lifetime mortgage?
Home reversion plans are not as commonly used as lifetime mortgages, but that doesn’t mean lifetime mortgages are automatically better. Comparing both options with the help of a financial adviser is strongly advised.
We’ve answered many more equity release FAQs!
This is just the tip of the iceberg when it comes to equity release and home reversion schemes. Learn more about these topics by reading out other guides. They will help you decide if you want to take your equity release journey to the next step or start considering alternatives.