There are a variety of equity release schemes available to those homeowners who are looking to release part, or even all, of the equity they have invested in their home. Many of these different schemes are customisable and can be used in very unique and innovative ways to help individual homeowners meet their retirement needs. A home reversion plan is one option available to homeowners.
Home reversion plans allow homeowners to sell part or all of their property in exchange for a cash payment. This cash payment is tax free and can be received in a couple of different ways including via a one-time lump sum payment or as income spread out over time. Along with this cash payment(s), the lender providing the home reversion plan also provides a lifetime tenancy agreement which applies to the portion of the property they now own. This amount can be nearly any portion of the home, all the way up to 100%.
There are some unique features that set home reversion plans apart from other equity release schemes:
1. Later Age. Home reversion plans typically commence at a later age than other equity release products. The minimum age for a home reversion plan is usually 65. If the homeowner is ill, this minimum age can reach as low as 60.
2. Terms. Providers of home reversion plans typically offer better terms to older applicants. This can mean that the homeowner is able to receive a larger cash payment than they would with other equity release products.
3. Property Value Increase. For those consumers who only sell of a part of their property, there is still the potential to reap the benefit of increase in property value. These homeowners may find that they want to release more equity from their home, should they still be found eligible.
Home reversion schemes are not very popular when compared to other equity release products. In fact, they only account for about 2% of all equity release schemes in the UK. There are a few different reasons for this seemingly unpopularity. First, if the homeowner dies in the first few years following their home reversion plan, the actual product could end up being a very expensive way to release their cash and equity. Secondly, with home reversion plans, homeowners must relinquish part of the ownership of their home which can make many of them feel uncomfortable.
The amount of cash released to homeowners is determined on an individual basis using a home reversion calculator. This calculator takes into account the valuation of the property in question, as well as the age and sex of the homeowner. Of course, home reversion lenders will also take into account that the homeowner is able to stay living in the property for the rest of their lives, without having to pay any fee or rent. This can often discount the amount of money paid out to the homeowner, depending on the age and life expectancy of that homeowner.
Similar to any financial product, a home reversion scheme comes with both advantages and disadvantages. Choosing whether or not to take out a home reversion plan can require a great deal of thought and careful consideration.
Advantages of a home reversion:
1. Homeowners are not required to sell 100% of their home. They are allowed to sell only a portion.
2. If a homeowner does not sell off 100% of their home, they can save the unsold portion for inheritance purposes.
3. Lenders do not charge interest on the cash paid out to the homeowner
4. There are no regular or monthly payments required. This allows the homeowner to use the cash they receive however they see fit without having to worry about making any regular payments to their lender.
5. Home reversions offer a significant benefit when the economy or housing markets are declining
6. Home reversion fees are typically low
7. High lump sums are available. In fact, the lump sums are typically much larger with home reversion plans than with other equity release products.
Disadvantages of a home reversion:
1. The home is sold at a discount so the homeowner is unable to receive full market value for their property
2. Minimum age is typically 65, unless the homeowner is ill, which can end up being much higher than some other equity release schemes
3. There is limited protection for those homeowners who pass away shortly after taking out their home reversion plans. For these consumers, a major stake in their home has been forfeited.
4. Homeowners cannot reap the benefit of an increase in the value of their property