Home Reversion Plans In the UK

A Home Reversion Plan and Calculator | February 2024

Home reversion plans are a type of equity release product that can provide a source of funds for a comfortable retirement. This financial plan involves selling all or part of your property to a reversion provider, whilst retaining the right to stay in your home for the rest of your life, rent free. 

Home reversion plans are a significant decision to make. This article will help you learn: 

– The historical and current market context of home reversion plans.

– An in-depth explanation of what a home reversion plan is.

– The benefits and drawbacks of opting for a home reversion plan.

– A comparison between home reversion plans and other equity release schemes so that you can see which plan is best for you.

– An overview of the legal aspects of home reversion plans in the UK.

Topics that you will find covered on this page

Home Reversion Plan

A home reversion plan involves selling all or part of your home to a home reversion provider.

In return, you receive a cash lump sum or regular income. Whilst this is tax-free for the first £10,000, this is taxable beyond that amount. This means that you retain the right to live in your home rent-free, either for life or until you move into long-term care.

The process of setting up a home reversion plan begins with a valuation of your property. The provider will determine the market value of your property, then calculating the percentage which they are willing to pay.

The provider takes into account that they will only receive their money when the house is sold, meaning that their price evaluation could be less than the current full market value. 

Once the home reversion plan is set up, you can choose to receive your money as a lump sum, or a regular income.

Remember, this choice should depend on your financial needs. If you opt for a regular income, the provider will invest the lump sum and pay you a portion of the investment returns each year.

However, it should be noted that a home reversion plan does reduce the value of your estate. This means that there will be less for your heirs to inherit when you die.

However, some providers offer a ‘no negative equity guarantee’, ensuring that your estate won’t owe more than the property’s value. This is regardless of whether house prices fall.

In addition, it’s important to note that home reversion plans are not available to all homeowners. This is because providers have eligibility criteria, such as minimum property values and owner age, that must be met.

Background of Home Reversion Plan

Home reversion plans were first introduced in the UK in the 1960s as a way for older homeowners to access the equity in their homes.

Although this market has gone through ups and downs over the decades, it has grown immensely in recent years. This is thanks to improved regulation and provider standards. However, home reversion plans still make up a small part of the overall equity release market in the UK.

The amount which you can release through a home reversion plan is dependent on the current market value of your property, and your age.

Generally, older homeowners can release more equity than younger ones. However, the actual amount varies from one provider to another.

A key aspect to understand is that you’ll no longer be the sole owner of your property. This is because you’ll be selling a part or the entire property to the reversion provider. However, you still retain the right to live in the property rent free until you die or move into long-term care

Home reversion plan calculator

You can use the equity release calculator above to estimate how much cash you can get, tax-free, when you sell part of your home through equity release.

The pros and cons of home reversion plans

Here is a short video that looks at the pros and cons of a home reversion plan.

Benefits and Drawbacks of Home Reversion

There are several benefits to choosing a home reversion plan. These include:

– The ability to release a tax free lump sum or receive a regular income.

– The certainty of knowing how much of your property you have sold, as well as how much you have retained.

– The ability to live in your property rent free for the rest of your life.

– Protection against falling house prices with a ‘no negative equity guarantee’.

– Potentially llowing those who want to stay in their home to fund care costs, while still living in their own home.

Unfortunately, home reversion plans also come with drawbacks which you should consider too:

– You won’t receive the full market value for your property.

– The plan reduces the value of your estate when it is eventually sold, leaving less for your heirs to inherit when you pass away.

– If you die shortly after taking out the plan, you could effectively have sold your property at a significantly reduced price.

– The plan is inflexible. If your circumstances change, it may be difficult to alter the arrangement.

How much can you get in exchange for part of your home?

To prevent negative equity, the amount that you can get is a percentage of your home’s value. Normally the share is between the range of 20% – 60% of property value. Therefore, the exact amount you get in return depends on property prices. How much you get also depends on your age. 

Typically, the older you are, the higher the percentage you may be offered.  However, typically, you never get more than 60%, because the home revision provider offering the equity release mortgage is taking a risk that the value of your house does not fall and, as we all know, house prices can fluctuate in certain circumstances.

In addition, lenders do not know when they will get their money back, as they cannot sell the property until you die or move into care. Also, remember that you often get less than what you perceive the full market value to be. 

Your maximum entitlement is based on the following factors:

– your age and health

– the current value of your house and what it is likely to sell for.

You should also remember that, even though the home reversion companies technically own part of the house, you could still be liable for other costs such as annual ground rent. This is irrespective of what proportion of your property has been sold.

Finally, all equity release plans require their customers to have access to a bank account for the sale proceeds to be paid into.

Speak To An Equity Release Advisor Or Use the Equity Release Calculator Below To Estimate How Much You Can Borrow

The UK Care Guide works in partnership with Boon Brokers, one of the UKs leading equity release specialists.

You can contact them on 0333 567 1607 , or use the equity release calculator to estimate how much you can borrow.

Here is what Boon Brokers Offer

Whole of market access
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Call Boon Brokers on 0333 567 1607 to discuss your equity release requirements.

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use the equity release calculator to see how much money you could release from your property. Takes less than 60 seconds!

All equity release and mortgage advice is provided by Boon Brokers Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757. 

If you take out a product with Boon Brokers, we will receive a fee for introducing you to them. Boon Brokers provides advice for free and without obligation.  By contacting Boon Brokers through us, the cost of any equity release product would be the same as if you had contacted them directly.  

The fee we receive is used to help keep this site operational and to produce new content.  

Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

Home Reversion Plan Versus Other Equity Release Schemes

Comparing home reversion plans with other schemes, such as lifetime mortgages is recommended. These are the two main types of equity release products available on the market.

One of these types is a lifetime mortgage, which involves borrowing a lump sum against the value of your home.

The loan and interest is then repaid when the property is sold. As opposed to a home reversion plan, you retain full ownership of your property. However, the interest can add up quickly, which can substantially reduce the amount left for your heirs.

A home reversion plan involves selling part or all of your property. This means that you know exactly what portion of your property you have sold and what you have retained.

However, you won’t receive the full market value for your property and the inheritance you leave once you pass away may not be as significant. 

Legal Aspects of Home Reversion in the UK

In the UK, the Equity Release Council is in place to regulate home reversion plans. This means that providers must adhere to a strict set of rules designed to protect consumers.

For instance, clear and transparent information should be provided, and customers should receive advice from an independent financial adviser before taking out a plan.

Because a home reversion plan is legally binding, it is crucial to source legal advice before entering into such a plan.

This will ensure that you understand the terms and conditions, as well as the costs involved and the impact on your estate.

You should also note that a home reversion plan could affect your entitlement to means tested state benefits. Therefore, remember to seek independent financial and legal advice beforehand regarding the potential impact on any benefits you receive.

Cash Release and Home Reversion

Home reversion schemes allow homeowners to unlock the equity in their property by selling all or part of it for a cash lump sum. This cash is appealing for supplementing retirement income, potentially paying off debts, or funding large expenses.

However, the cash lump sum which you receive will be less than the home’s market value. This is because the reversion provider considers the fact that they will allow you to live in your property rent-free for the rest of your life.

It is also necessary to recognise that releasing equity through a home reversion plan can have an impact on your means-tested benefits. The cash lump sum might affect your eligibility for certain benefits, depending on your financial situation.

Lastly, while a home reversion plan allows you to access a large sum of money, it can also reduce the value of your estate. As mentioned previously, this could result in your heirs receiving less inheritance when you pass away.

home reversion plans

How Will You Receive Your Money?

When you take out a lifetime mortgage or a home reversion mortgage, you can choose to either have your cash paid to you as a one-off lump sum or you can look to take it as an income while you are alive.

Lump sum

The benefit of taking it as a tax-free cash lump sum is that you get a large loan upfront.

This gives you the freedom to do something nice with it, or use it to modify your home to make retirement easier.   However, there is a risk with this option, because if your money runs out and you spend it all, how will you meet the costs of care later in life? 

If you think you would like these sort of plans, seek advice and information from an independent company or service. Advisers are useful, as they give advice based on their personal experience with the process, and can give you a personalised illustration regarding how much you might get and how the debt might affect you. There are also many guides and tools online, which can help make the process easier. 

Ongoing regular income

While it’s not as lucrative as receiving a tax-free cash lump sum, an ongoing regular income does at least guarantee that you will be paid regular amounts for the rest of your life, or at least until you go into a care home.

However, the danger with this is that if you die shortly after taking out your plan, a large percentage of your inheritance will be lost. This can have a big effect on the size of the inheritance your beneficiaries get. 

Some plans do offer protection for your capital,  so this is something you might want to ask the company about. 

The Drawdown Lifetime Mortgage Alternative 

Another popular equity release scheme is the drawdown lifetime mortgage. Unlike a home reversion plan, a drawdown mortgage allows you to release equity as and when you need it. For instance, rather than receiving a large sum at once, you can take smaller cash releases over time.

Another appealing factor with the drawdown option is that it can provide more autonomy and control over your finances. This can also help reduce the amount of interest you pay, as interest is only charged on the money you withdraw.

However, it’s worth noting that with a drawdown lifetime mortgage, you retain ownership of your own home. This means you’re still responsible for the maintenance, as well as other costs such as utility bills.

Conversely, you should also be aware that it is a high-risk product that should be considered carefully. Like home reversion, it can affect your eligibility for means-tested benefits and reduce the value of your estate.

Understanding Property Value Impact

The value of your property is what directly influences the amount of money you can release with your home reversion plan.

As property prices fluctuate, so too does the potential cash lump sum which you may receive.

If home prices rise, homeowners who have already entered into a home reversion scheme may find themselves selling a part of their home at a much lower price than its current market value. However, if property prices fall, you could benefit from having received a cash lump sum based on a higher property value. 

As discussed previously, you won’t receive the full value of your property in a home reversion plan.

The cash lump sum offered by the reversion provider is typically less than your home’s market value, taking into account that they will only be able to sell the property once you pass away or move into long-term care.

Although house prices have historically trended upwards over the long term, it’s important to note that they can also decrease or remain stagnant for prolonged periods.

Consequently, a home reversion plan involves risk and uncertainty around future property values.

If opting for a home reversion plan, it’s advisable not to rely solely on potential property price growth for your income. Therefore, it is important to consider other sources of retirement income too in case prices stagnate or fall.

Home Reversion Plan in Practice

Home reversion plans work in a straightforward manner.

Such that, once a homeowner decides to go ahead with a plan, the property is valued, and a percentage of its value is agreed to be sold to the home reversion provider.

Following this, the homeowner receives a tax-free cash sum or regular payments, and they can continue to live in their own home, rent-free, for the rest of their life.

Based on their financial needs, the homeowner may then choose to sell all or a portion of their house. They also keep a portion of the property if they choose to sell just a portion of their house.

This implies that they will profit from an increase in the value of their retained portion, should property values rise.

However, it’s crucial to realise that a home reversion plan cannot be simply undone once it is implemented.

Therefore, before commiting to a plan, homeowners should carefully weigh up their options, and remember to receive free advice from an independent financial consultant.

Income Option Considerations

Some homeowners prefer to receive a regular income rather than a lump sum from their home reversion plan.

This income option can provide a reliable and steady stream of money, which can be useful for covering regular expenses. For instance, care needs or day-to-day living.

However, opting for regular income payments rather than a lump sum will typically result in a lower total amount being received over time. This is because of the way in which providers calculate and pay income from their underlying investments.

Interest Considerations in Home Reversions

One of the most appealing benefits of home reversion plans is that you do not have to pay interest. This is unlike other equity release schemes, such as lifetime mortgages, where interest can quickly accumulate over time. 

Consequently, not having to make monthly interest payments can be a significant relief, particularly for those who are retired and may be on a fixed income. It provides homeowners with the freedom to use the money they receive from the home reversion plan without worrying about accruing interest or making regular payments.

However, although there’s no interest to pay in a home reversion plan, there are still other costs that should not be overlooked.

These include setup fees, legal fees, and valuation fees. Therefore, it’s advisable to understand all the costs involved before proceeding with a home reversion plan.

Further Cash Releases and Lifetime Leases

With some home reversion plans, it may be possible to arrange for further cash releases in the future. This can be particularly beneficial if you need more money as you get older, such as to pay for long-term care or other unexpected expenses in later life. 

However, the ability to secure further cash releases will depend on the terms of your home reversion plan and whether you sold the entire property or just a part of your home to the reversion provider. If you only sold a portion, you could potentially sell more of your home to the provider in the future.

You are granted a “lifetime lease” on your property as soon as you sign a home reversion plan, which relates to living arrangements.

This lets you spend the rest of your life in your house without having to pay rent. Therefore, you will still be responsible for upkeep of the property, utilities, and other costs.

home reversion plan calculator

High-Risk Factors and Means-Tested Benefits

Although home reversion plans can provide valuable financial relief, you should note that they are considered high-risk products. This is because your home is a valuable asset to sell, and it is typically sold for less than its market value.

If you pass away or move into long-term care shortly after taking out the plan, you could effectively have sold your property at a dramatically reduced price.

As outlined earlier, your eligibility for means-tested benefits could also be affected. The cash you receive from the plan, whether as a lump sum or regular payments, might push your savings over the limit for certain benefits. 

Lastly, a home reversion plan is a long-term commitment that can be challenging to reverse. This makes it necessary to consider all the implications and alternatives before deciding to proceed with such a plan.

A Case Study On Navigating the Home Reversion Plan

To understand the Home Reversion Plan in a real-world context, we have provided a case study to consider. This example should be relevant to individuals who are approaching retirement age and considering the best ways to manage their finances during this stage of life.

Meet John, a retired man of 70 who resides in his own house.

Although John’s state pension is his primary source of income, he’s finding it harder to maintain his lifestyle with costs of living rising. This has led John to start thinking about a home reversion plan, as he doesn’t want to sell and downsize.

The value of John’s home is £300,000, making the decision to give a home reversion provider 50% of his property. He was given a lump sum of tax-free cash in return, which he could use to increase his income. John was given a lifetime lease, allowing him to live in his house without having to pay rent for the remainder of his days.

John carefully considered the risks, including not receiving full market value for the share sold and reducing the future inheritance for his family.

He decided to seek financial advice to assess any impact on his benefits, discovering that the lump sum payment which he would receive fell below the threshold that would affect his entitlements.

Lastly, John considered the possibility of needing long-term care in the future. With a home reversion plan in place, he could remain in his home as long as possible.

However, he knew that if he needed to move into a care home, the remaining equity in his house could be used to fund his care.

home reversion schemes

Key Takeaways and Learnings

This article has explored the concept of Home Reversion Plans in great detail. Bellow is a summary of the key points:

– Under a Home Reversion Plan, you sell all or a portion of your house to a provider in return for a tax-free lump sum payment or ongoing income, but you still get to live in the house rent-free for the remainder of your days.

– Because you sell your property for less than its market value, the plan is a high-risk investment. It may also drastically lower the value of your estate, limiting the amount you can leave to your heirs.

– The lifetime mortgage and other equity release products are not the same as the Home Reversion Plan. Knowing these distinctions is essential before making a choice.

– Opting for a Home Reversion Plan can affect your eligibility for means-tested benefits. That is another reason to seek advice from an independent financial adviser before proceeding.

– The Home Reversion Plan can be a suitable option for those needing a lump sum or additional income during retirement. However, it’s not without risks and should be considered carefully.

– If you need long-term care in the future, the remaining equity in your home (if you’ve not sold 100% of it) can be used to cover these costs.

In conclusion, a Home Reversion Plan can be a valuable tool for older homeowners looking to unlock the equity in their property. However, It’s crucial to understand how the plan works, the risks involved, and the impact on your financial situation.

Since each person’s circumstances are different, what works for one person may not work for another. Therefore, before determining whether a Home Reversion Plan is the best option for you, it is always advised to consult a professional. You can make the choice that best fits your needs and situation by taking the time to learn about the ins and outs of this financial product.

FAQ

1. How does a home reversion plan work?

A home reversion plan works by allowing you to sell all or part of your property to a reversion provider. In exchange, you receive either a tax-free cash lump sum or a regular income. Despite selling a portion or your entire home, you retain the right to live in it, rent free. This will be until you pass away or move into long-term care. 

2. Are home reversion plans considered high-risk products?

Yes, home reversion plans are considered high-risk products. It is important to note that you are selling your home, which is considered a highly valuable asset. Consequently, you will receive less than its market value. If house prices rise significantly after you’ve entered into a home reversion plan, you could end up having sold a portion of your home for significantly less than its worth. Furthermore, the plan is not very flexible. This means that if your circumstances change, it can be difficult to alter the agreement.

3. How can a home reversion plan affect my means-tested benefits?

The tax-free cash lump sum which you receive from the plan is considered as capital for means-testing purposes. If this increases your savings above a certain threshold, it could affect your entitlement to certain means-tested benefits.

4. Do I have to pay rent after selling my home through a home reversion plan?

No, one of the significant benefits of a home reversion plan is the right to live in your home rent-free for the rest of your life. This is arranged through a ‘lifetime lease‘ which is part of the home reversion plan agreement. Conversely, while you don’t have to pay rent or monthly repayments, you’ll still be responsible for the maintenance of the property and other related costs such as insurance and utility bills.

5. Can a home reversion plan help with long-term care costs?

Yes, a home reversion plan can potentially help with long-term care costs, specifically if you choose to receive regular payments.

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Where applicable, the adverts for Boon Brokers on this page have been signed off as a Financial Promotion by Boon Brokers Limited, to ensure that they are in compliance with Section 21 of FSMA. Boon Brokers Limited is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757. The Age Partnership equity release calculator has been approved and provided by Age Partnership. Age Partnership is a trading name of Age Partnership Limited, which is authorised and regulated by the Financial Conduct Authority. FCA registered number 425432.

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All equity release advice is provided by Boon Brokers Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757. 

 

If you take out a product with Boon Brokers, we will receive a fee for introducing you to them. Boon Brokers provides advice for free and without obligation.  By contacting Boon Brokers through us, the cost of any equity release product would be the same as if you had contacted them directly.  

The fee we receive is used to help keep this site operational and to produce new content.  

 

Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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