Home reversion is a form of equity release where you sell a percentage, or all, of your home in return for a tax-free cash lump sum, a regular income or both. This means that the provider you sell it to will own part, or all of your home but will continue to let you live there rent free until you die or move into long term care.
How does home reversion work?
Quite simply, home reversion involves you selling a percentage of your home to an equity release provider. In return they will give you a cash lump sum, or an income, and allow you to continue living in your home rent-free until you die or go into long term care.
With a home reversion plan, you will typically only get between 30% to 60% of the market value of the part of your home that you sell. This is particularly low because there is no interest to pay on the money you take out and because you are being allowed to live in your home rent-free until you die or go into long term care. The provider cannot force you to sell it until then.
Typically, the older you are when you take out a home reversion scheme, the higher the percentage of the market value of your home you will receive as the provider will assume that you will need to continue living in it rent-free for a shorter period of time.
It’s vital to understand that home reversion is not like taking out a loan such as a mortgage. There is no interest to pay, as there is no loan – you are simply selling a part of your home to the company rather than borrowing a fixed amount against it. Whilst this means that there is no interest to pay, it also means that you won’t fully benefit if your house rises in value – the company who owns a part of your home will benefit in the growth in value from their share of your property.
Home Reversion vs Lifetime Mortgages
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.
How much does Home Reversion cost?
The two biggest ‘costs’ of a home reversion plan are actually not always obvious, as there is no fee or specific charge to highlight these elements. The first is the discount to the market value of your home you receive when you release money from your property – typically you only receive 30-60% of the market value of your home depending on your age and other circumstances. The second is a hypothetical cost, but potentially significant and this is the missed opportunity to benefit from any increase in the value of the part of your home you have sold.
In addition to these two key elements, when taking our a home reversion plan you might also have to budget for:
- a charge payable to the financial advisor who assesses the suitability of a product to your needs
- an arrangement fee to the provider for the product
- Property valuation fees – the valuation of your property will determine how much of your home you have to sell, to receive a specific amount of money. It’s therefore worth ensuring you pay for an independent valuation rather than simply accepting a valuation suggested by the reversion company.
- Legal fees – the terms of your lease must be scrutinised by a solicitor working on your behalf to protect your interests to ensure you understand the terms of the lease and are comfortable with them.
- Buildings insurance – providers will insist on you maintaining appropriate buildings insurance to protect the property
- A regular maintenance budget to maintain the property inline with the terms of your lease.
Pros and cons of home reversion
While the advantages and disadvantages of home reversion plans will differ, depending on your personal situation, there are some general pros and cons:
Pros of home reversion
- The option of either a tax-free lump sum or income from the sale of a portion of your home to your lender.
- You are able to stay in your home and avoid the stress of moving,
- If your estate is over £325,000, then home reversion could help reduce the value of your estate and therefore your inheritance tax liability, while still leaving a portion of your property’s value to your loved ones.
Cons of home reversion
- You are unlikely to receive a sum that reflects the market value of your home. Most home reversion deals offer between 30% to 60% of the market value on the part of your home that you sell.
- Receiving money from home reversion could potentially impact your entitlement to state benefits.
- You will no longer be the sole owner of your home, and home reversion often comes with agreements of maintenance and insurance that you might not have otherwise needed.
Is home reversion right for me?
Equity release products are high risk and are not suitable for many people. They can also have significant implications for tax, benefits, inheritance and your long-term financial planning.
You will need to speak to a qualified financial advisor before you can take money out of your home through a home reversion product or any other form of equity release. It is also essential to appoint your own solicitor to check the lease and give you impartial advice.
Some key questions to consider are:
Home reversion schemes are typically more suitable for those in their 70s or 80s. Typically the older you are, the higher a proportion of the fair market value of your home you will receive.
Taking a lump sum out of your home through equity release will affect your entitlement to any means tested benefits such as Universal Credit, Housing Benefit or Pension Credit. Any money taken out is classed as ‘capital’ in any calculations for means tested benefits which can reduce, or stop your eligibility entirely. Read more about how lump sum payments and savings can affect means-tested benefits here.
If you sell a share of your property then you, or your estate will not benefit in any growth in house prices on the part of your home you have sold. This can have significant implications on the value of any inheritance you would like to leave your loved ones.
Lease terms and conditions
With home reversion, as you are selling part of your home rather than taking out a loan against it, you will be subject to the terms and conditions of the home reversion company’s lease you have chosen. This means you are no longer free to do what you want with your home. This will typically require you to maintain your home to a certain standard at your own expense whilst you live in it and you could still be liable for other costs such as ground rent no matter what proportion of your home has been sold. It could also place restrictions on any home improvements or extensions you would like to make. You will need to get an independent solicitor to look over the terms of the lease before you sign it to ensure you understand your obligations and are comfortable with them.
Your ability to move home
It’s important to understand whether the home reversion scheme will allow you to move home if you want, or need to. You should also make sure you’re clear what fees and charges will be levied if you do move and how the scheme provider will calculate the proportion of your new home that they own.
Difficult to unwind
These types of equity release scheme can be extremely difficult to unwind or cancel if you change your mind. This is why it’s a regulatory requirement to seek legal and financial advice before entering into a home reversion plan to ensure that it really is suitable for your circumstances.
Getting advice on equity release
If you’re considering taking out an equity release product, it’s a requirement from the financial services regulator, the Financial Conduct Authority (FCA), that you seek professional financial advice first, to help ensure you make an informed decision and are aware of the risks involved..
A good financial advisor can help you understand the best option for you and recommend a suitable product from a member of the Equity Release Council (ERC). The council has a number of product standards which help safeguard borrowers so it is important that any provider you choose is a member. Advisors can also be members of the ERC.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
If you’re looking for more information on equity release and how it works you can find more information in the following articles:
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