In this brief blog, we are going to discuss what a home reversion plan is, its benefits or disadvantages.
What is a home reversion plan?
A home reversion plan is a type of equity release where you sell all or part of your home to a home reversion plan provider for less than your property’s market value. You then get to live in the property as a rent-free tenant and in return, you get a tax free lump sum or a regular income or both. You will usually need to be above 60 years to get access to this.
As a general rule, you have to be:
aged 65 and over
a homeowner, and
a UK resident.
In most cases your property must also be:
in England, Scotland or Wales
your main residence
worth a minimum of £100,000, and
made of standard construction.
To use the home reversion plan you will need to have some equity in your home which is sufficient enough to release equity.
Home reversions are high-risk products and you may want to seek independent financial advice before you take out a plan or any other form of equity release such as lifetime mortgages.
Home reversion plans could have major implications for tax, benefits, inheritance and your long-term financial planning.
Are home reversion plans regulated?
Home reversion plans are regulated by the financial conduct authority. This means if you are mis sold a home reversion plan you may be able to claim any compensation by being mis sold a financial product and you will be able to complain to the financial conduct authority if the company is not able to resolve your complaint.
How do home reversion plans work?
Home reversion plan works by offering you a percentile of the value of the equity you own in your property. You could decide to sell all the equity you have in your property or some of the equity you have in your property.
The home reversion plan provider may offer you between 20% to 60% of the equity you want to sell to the home reversion provider.
You will then have to decide if you want a lump sum, a regular income or both of these.
To recover the funds released to you the home reversion company will sell your home when you die or move into long term care.
The home reversion company will keep its share of the sale proceeds and give the rest to your estate. You can use this as part of your inheritance.
If you sold the entire property to the home reversion company then the home reversion company will keep the full proceeds of the home sale.
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.
How much can you get from a home reversion plan?
A home reversion plan could pay you between 20% to 60% of the equity in your home which you want to sell.
Example: You want to sell 70% of the equity in your home which is valued at £100,000 then the home reversion company may offer you between 20% to 60% of the £100,000 as a tax-free lump sum or a regular income or both.
The amount you can release from your home reversion plan is based on your age and your health. You will be able to release much more equity if you are much older or closer to die. Example if you have a terminal illness. A home reversion plan may, therefore, be more suitable to people who are over 70 years of age.
The reason you get so little if you are much younger and healthier is that the home reversion company is taking a risk on the price of your home for a much longer period before they anticipate you will die or move into long term care.
The home reversion company looks to make money in the difference between how much equity they released to you and the value of that equity when they sell the property upon your death or when you move into long term care.
Should you take a Lump sum, income or both?
When trying to decide how you should release equity from your home with a home reversion plan you should consider which way you want to release equity.
You should seek independent financial advice on this.
A lump sum may be a good idea if you have large costs you want to pay off or maybe you want to pay off your mortgage. You may also want a lump sum if you want to provide a mortgage deposit to a family member or friend.
The issue with a lump sum is that it may not last to you throughout life, depending on how you manage your money.
A lump sum may also have some tax liabilities or cause you to become ineligible for any benefit you were claiming
Taking a regular income will give you much more guarantee that you will have an income in your later years. The issue with this is that if you die soon after taking out the home reversion plan you will not have used most of the equity you have released. There will be now way to get those regular payments you have lost and this means your estate will have lost out on this inheritance( the equity in your home) for nothing in return to you or them.
There are some home reversion plans which cater to this and protect you against it.
Finally, you can take but a lump sum and a regular income as this will help you mitigate such risks as mentioned above.
Advantages of home reversion plans
You get access to a regular income or a large lump sum which you can use to go on holiday, gift a mortgage deposit to your family member, invest or even buy a new home.
The lump sum you get is tax free. This is only for your main property, everything after that may be taxed.
You will get money which you can use for your health care and other living costs.
You may be able to move homes as long as the home reversion plan provider approves your new home.
You will get to stay in your home rent-free till you die or move into long term care.
Equity release schemes such as this could reduce your inheritance tax liability.
You don’t have to move homes to release equity.
You don’t have to sell all your property, you can ring fence some of the equity in your property to pass down to your estate as an 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.
Disadvantages of home reversion plans
The income received from a home reversion plan may affect your income tax liability.
You don’t get anything near the full value of the equity you are releasing.
You might become ineligible for some benefits which you were previously claiming.
You will reduce the amount of inheritance you would pass back to your family and you won’t be able to gift them the whole house anymore.
You will no longer be the only owner of your home.
If you want to get out of the home reversion plan you will then need to buy back the equity you sold to the home reversion company at full market value. This means you have taken a big loss.
If you die soon after taking a home reversion plan with regular income then you will have lost a significant value of your home in return for not much but there are some home reversion plans who cater to this through a rebate.
You must have buildings insurance.
You will be required to keep your home in good condition. This means you may have some future repair costs.
You will still be required to pay for your council tax, utility bills etc
You may not be able to port this equity release plan.
Some providers will also not allow you to move in family members or friends into the home without their express permission.
There may be a lot of fees associated with taking this plan out. This could be fees such as valuation fees, legal fees and even financial advice fees.
Alternatives to a home reversion plan
You may be able to fund your long term care or have a regular income by doing other things. we have listed a few of these options below:
Downsize your home:
You could sell your current home and by a much smaller and much cheaper one in order to get some of the equity you have in your home.
Ask your family for financial assistance:
The main concern for most people when thinking about equity release schemes is that they will not leave much money behind for their family. An alternative to equity release schemes could simply be to ask for your family to help during financial difficulty.
One of the only ways you can ensure your family gains most of your property as an inheritance upon your death is by preventing the amount of interest which is accrued with an equity release scheme or prevent getting into an equity release scheme in the first instance.
For these reasons, family members are more likely to want to assist in preventing much of the home end up with the equity release provider and will be more likely to help.
Use the Governments rent a room scheme:
You could simply take in a lodger by using the governments rent a room scheme and benefit from a £7.500 tax-free income annually. Even if you aren’t eligible for the rent a room scheme the income you earn may be sufficient to help you.
If your home is mortgaged, ensure you have checked with your mortgage lender to ensure you aren’t breaking the terms of your mortgage agreement by taking in a lodger.
If you rent from the council or recently bought your home using the right to buy, preserved right to buy or the right to acquire scheme then you should ensure you check with your council or landlord before taking in a lodger.
Use other means of finance:
You may be able to borrow from your credit cards, get a secured loan on your property or get an unsecured personal loan. Although some of these methods of finance may prevent you from borrowing for a long period of time depending on your age, credit score and current income, some may be suitable for you and may represent better value over your term of borrowing than with an equity release scheme.
Reduce your living costs:
The first reason why many people will seek an equity release scheme sich as a home reversion plan is that their current living expenses are probably too much in comparison from whatever income they may be receiving from businesses or their pension.
A possible solution to this problem which may be an alternative to an equity release scheme will be to cut down on your current living expenses.
This could mean refinancing your car, remortgaging to a better rate (if your home is mortgaged), refinancing your personal loan, switching to a cheaper credit card, switching your broadband, switching your electricity and gas supplier etc
Obtain a grant for home improvements:
If you are looking to use a home reversion plan as financing for any home improvements you want to make on your home then you should look to see if you can obtain financing from your local council as an alternative to equity release.
You may be able to obtain financial help from your local council if you are looking to fit a lift or cavity wall insulation in your home. You will usually need to be a low income household for any grant funding to be available to you.
Use your investments and savings:
Your investments and savings could be used as an alternative to equity release schemes if you currently have any investments or savings.
When applying for an equity release scheme you will undertake a fact find which will look to determine your complete financial situation.
If the adviser feels that you should possibly use savings or investments you already have which may save you thousands of pounds in interest over the next few years in comparison to an equity release scheme then they will let you know.
By doing this you are essentially pushing back the need for an equity release a few years back and saving yourself some money.
Apply for eligible benefits:
There are many benefits which you may be eligible for based on your income, where you live, your age etc. You should always check to see you have claimed all benefits which you are eligible for as this could boost your income and be a good alternative to equity release.
You may be eligible for benefits such as pension or savings credit, council tax reduction or even disability benefits.
Go back to employment:
An alternative to a home reversion plan could be to simply go back into employment or start a part-time job or business. This will mean you can earn extra income to help you and prevent you from needing an equity release scheme at least for a year or so.
Get a standard remortgage:
Not all mortgage lenders will lend to people over 75 but if you are under the age of 75 then you may be able to get a standard remortgage where you essentially extract equity out of your home without having to use an equity release scheme.
You should seek the advice of a mortgage broker, an independent financial adviser and maybe a legal advisor before you do this.
Remortgages will incur costs such as conveyancing fees, mortgage fees, stamp duty etc.
Note: mortgage lenders don’t just look at your age when you take out the mortgage but your age upon when the mortgage term should ideally end.
To be eligible for a remortgage you will ideally need a good credit score, if not you should look to build credit, a sizeable mortgage deposit or equity and some regular income. You may also be eligible for interest-only mortgages if you find it difficult to get a standard remortgage.
In this brief guide, we discussed the home reversion plans. If you have any questions or comments please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.