Using a home reversion plan to pay for your care

Money Advice Service

If you’re over 65, own your home and need to fund your long-term care, you may be considering a home reversion plan. Here’s how they work and some pros and cons to consider.

What is a home reversion plan?

It’s a type of equity-release scheme that lets you use some of the money that’s tied up in your home.

You could use this to pay for your long-term care, but only if you’re looking to stay in your home.

With a home reversion scheme, you sell all or part of your property at less than its market value in return for a tax-free lump sum, a regular income, or both, but stay on in your home as a tenant, paying no rent.

Home reversion plans are one of the two main types of equity release. The other is a Lifetime mortgage.

Home reversion plans are high-risk products.

They could have major implications for tax, benefits, inheritance and your long-term financial planning.

You should always get independent financial advice before taking out a home reversion plan or any other kind of equity-release scheme.

This will help you find out whether it is appropriate for your personal needs and circumstances.

How do home reversion plans work?

With a home reversion plan you sell all or part of your home in return for a cash lump sum, a regular income or both.

When your home is eventually sold, the reversion company gets their share of the proceeds of the sale.

If you sold the entire property to them they will get all of the proceeds.

If you sold part of your home, say a half, the reversion company gets that share of the proceeds, leaving the rest to go towards your inheritance.

How much will you get?

You’ll usually only get between 20% and 60% of the market value of your house, depending on your age and state of health.

This is because the reversion company is taking a risk on house prices and in not knowing when it will get its money back, as they cannot sell the property until you die or move into care.

In the meantime, you get the right to carry on living in the home, paying no rent.

The older you are when you start a home reversion scheme, the higher the percentage you’ll get of your home’s market value.

For this reason they are normally best suited to those over 70.

You could still be liable for other costs such as ground rent (or chief rent) no matter what proportion of your home has been sold.

This is an annual sum payable on some freehold properties.

Lump sum, income or both?

  • A lump sum gives you the freedom to manage your money, but if you live to a very old age you might have little of it left for your later years.
  • With the income option, there’s the peace of mind of knowing you’ll receive regular payments for the rest of your life, but if you die soon after taking up the plan and have only taken a few payments, you will have lost a large sum from your inheritance for very little in return (although some plans do protect against this).
  • Many people find that a mixture of both offers the security and flexibility they need.

Key safeguards

The Financial Conduct Authority (FCA), the UK’s financial services regulator, regulates home reversion plans.

This means that firms advising on or selling these products have to meet certain standards and provide clear complaints and compensation procedures.

What are the pros and cons of home reversion plans?

Pros

  • You’ll receive money to pay for your care and living costs.
  • You get to stay in your own home for the rest of your life, or until you have to move permanently into care.
  • You won’t have to go through the process of moving home.
  • The equity released on your main property is tax free.
  • Equity-release schemes can help to reduce your Inheritance Tax liability.
  • You can sell only part of your property, leaving the rest towards your inheritance.
  • If you are self-funding your care you might be able to use the capital raised to purchase an immediate need care fee payment plan to deliver a regular income to pay for care.

Cons

  • It might affect your entitlement to benefits, or support from your local authority, as any money you raise through equity release is likely to affect the assessment of your income and capital.
  • The inheritance you pass on to your beneficiaries will be substantially reduced and won’t include your home itself.
  • You’ll receive considerably less than the full market value for your property.
  • You’re no longer the sole owner of your home.
  • If you end a plan early, you would need to buy back the share you sold at full market value which could be a lot more than you sold it for.
  • A home reversion scheme could also be poor value if you die shortly after taking it out, though some schemes give families a rebate should you die within the first few years.
  • They can be inflexible if your circumstances change – not all equity-release schemes are portable from one home to another and you’ll usually need the provider’s permission for someone else, such as a relative, carer or new partner, to move in.
  • You might need to pay arrangement, valuation and legal fees.
  • You’ll be required to have buildings insurance.
  • Lenders will expect you to keep your home in good condition, so you will need to set aside some money for repairs and maintenance.

You will still be responsible for paying your utility bills and Council Tax, so you’ll need to make sure you can afford these.

Home reversion plans versus other ways of funding care

Case study

“I knew I’d have to pay for my own care, so had been thinking about a home reversion plan before house prices fell. The annoying thing is that if I take out the plan now, and house prices recover, then it’ll be the reversion company that benefits, and not me.” – Moira

So how do home reversion plans compare to other means of funding your long-term care, such as downsizing, insurance policies and investment products?

Typically, home reversion schemes don’t offer the best value for money, particularly since you never receive the full market value for your property.

For this reason, equity-release schemes tend to be regarded as a last resort for homeowners.

Talk to family members before making any decision. It might be that they can help you or come up with alternatives.

Consider what grants or subsidised loans might be available if you’re raising capital to improve or modify your home.

Downsizing is a more cost-effective option that can free up the money you need and allow you to maintain your financial independence and perhaps allow you to live in a property more suited to your needs.

However, it can be both time-consuming and stressful to downsize, and you’ll have to move from your current home.

Next steps – get independent advice

If you do decide to go ahead with a home reversion plan, it’s essential to Speak to an independent financial adviser.

Preferably one with the specialist CF8 qualification on advising on the funding of long-term care.

More information on home reversion plans

Find out more about home reversion plans on the Which? Website.

Contact Step Change a charity that can provide free advice on money matters and equity release.

This article is provided by the Money Advice Service.

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Some important information about Rest Less Money

We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.

When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.

Key things to remember when using Rest Less Money:

We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.

No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.

 

Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.

A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested. 

We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

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