Home reversion – what is it and how does it work?

There are two main types of equity release products available and it’s important to understand the differences between them. Home reversion is when you sell a percentage of your home to an equity release provider. With a lifetime mortgage, which is the most popular type of equity release scheme, you take out a loan that is secured against your property, but crucially the provider does not own part of your property. Learn more about lifetime mortgages in our article, Lifetime mortgages explained.

According to the Equity Release Council, which is the trade body for the equity release sector, home reversion made up less than 1% of all equity release plans taken out in 2020 with the vast majority of plans taken out being lifetime mortgages.

Below is an example to illustrate the difference between how these two types of equity release plan might look financially.

Barbara takes out a cash lump sum of £20,000 through a home reversion plan against a property value of £300,000. For illustration, let’s assume the £20,000 was taken out at 40% discount to the agreed market value of the property (it can be anywhere from 30%-60%). This would mean that Barbara has essentially sold a stake in her property worth £50,000 (£20,000 is 40% of the market value of £50,000).

This means that Barbara has sold 16.6% of her property to the home reversion provider (£50,000 divided by £300,000). If Barbara was to move out of her house into long term care in 10 years time, and at this point in time the house is now worth £400,000, the home reversion company will be owed £66,666 – significantly more than the £50,000 market value for her share of property at the time released, and over three times more than the amount of money Barbara took out of her property – the initial £20,000 she received.

In this same example, if Barbara took out a lifetime mortgage, the other main type of equity release in the form of a loan, rather than selling part of her home through home reversion, the numbers would look very different. For example, Barbara would have taken a £20,000 equity release loan against the value of her property. In the same scenario where she moves into long term care in 10 years time, she will have accrued interest of £6,997 on the £20,000 loan, but she will benefit from all of the growth in the value of her property. The total amount repayable to the equity release provider under this lifetime mortgage example is £26,997 vs a total amount payable of £66,666 under the home reversion scheme.

For simplicity, the example above has ignored the impact of any fees and charges for either product and it’s important to note that in this example, the total amount repayable is very sensitive to any increase in the value of Barbara’s property. For example, if property prices do not increase in value over the 10 year period – then the total amount repayable would actually be lower under the home reversion product. There is no way of predicting what will happen to house prices as they can fall, as well as rise, however over most long term horizons of 10 or 20 years, the long term trend of house prices in the UK has been to rise. In a scenario of rising house prices it will almost always be more cost-effective to take out a lifetime mortgage vs a home reversion plan.

You can read more about this in our article Lifetime mortgages explained.