This article was last updated on 1 November 2020.
I’m sure you will agree that when it comes to understanding how equity release works, it can get confusing. Luckily, we are here to help.
The key topics in this guide will help explain home reversion schemes in a very straight forward way. In this guide, you will find the following:
Specifically, this short video explains how home reversion plans work in more detail.
Equity release schemes are rapidly growing in prevalence in the UK and overseas – and with good reason.
As more and more people are unfortunately finding they have left it too late to prepare for the cost of care in retirement, equity release is becoming an increasingly popular option.
The two most popular types are either a lifetime mortgage or a reversion scheme.
A home reversion plan is primarily suited to individuals over 65 looking for a solution to their finances. This type of equity release scheme allows you to instantly release and use a portion of the money tied up in your property.
In essence, a home reversion plan involves you having to sell all or part of your home for a sum less than its full market value. In exchange, you’ll receive a tax-free lump sum or regular guaranteed payments. Meanwhile, you’ll be able to remain living at home as a tenant, completely rent-free, without the commitment to regular repayments. This makes it a good choice for those that want lifetime tenancy despite no longer being the sole homeowner, including those that require support or care but would like it administered at home.
Although a plan sounds attractive at first glance, there are some important disadvantages to think about. You can read about some of the negatives below.
With a home reversion scheme, you agree to the conditions of a lifetime lease. Before you approach a provider, carefully consider your future prospects and be honest with yourself and family members about how realistic it is that you will be able to remain in your property for the rest of your life.
These plans tend to be inflexible in the event of a change of circumstance – and leaving the contract early would force you to buy back the share of your estate you sold, this time at full market value. This can be tricky if your money is tied up paying for the ongoing cost of care – and also leaves you significantly out of pocket because the original sale was made below full market value.
These plans are undoubtedly higher-risk – but can be incredibly useful for individuals who know they are likely to remain in their own property and need to release funds early to pay for home care administration, or modifications to their property to enable them to stay.
Because this option is only suitable for those who know that they can and will remain in their property, it can be a little restrictive – and is naturally not open to everyone.
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.
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.
Here is a short video that looks at the pros and cons of a home reversion plan.
– It’s a great way to access quick money to pay for retirement in later life. The proceeds can also fund your long-term healthcare costs.
– You get to stay in your property and benefit from the equity you have built up. You live in your home rent-free.
– The money that you take out of your property is tax-free.
– It’s an efficient way to avoid inheritance tax, increasing the amount you can leave to a partner or other family members. You can read more about this here.
– It helps with your estate planning, as you can use part of the cash to fund your long term care, and part you can leave as an inheritance to your loved ones.
– If you want to buy a care fees annuity, you can use the proceeds of the plan to pay for this.
– No repayments are necessary until you die or move into long term care, unlike with other forms of debt
– The majority of providers are authorised and regulated by the financial conduct authority (FCA) and are therefore on the financial services register, giving you peace of mind that things are fair.
– Due to the extra income, you might find that there is an impact on the benefits you receive from the government, particularly if you receive means-tested benefits. This is because it will impact the assessment they do to see what income and capital you have. You can read more about that here.
– Another big thing is that homeowners won’t have a property to pass on as an inheritance, as it will need to be sold to pay off the debt when they move into a care home or die.
– Even though you will continue to live in the home, you will no longer be the sole owner of the property. This point can put many homeowners off.
– If you decide to change their mind, there will likely be financial implications. This is because if you decide to buy back your share of the house, the rule is that you need to pay the entire market rate, and this could be more than the amount received for your share in the first place.
– Any costs associated with the transaction are paid by the homeowner. There are a number of payments homeowners might need to make, including a valuation fee and an advice fee (we strongly recommend having your questions answered by an expert adviser).
Choosing the best equity release scheme for your needs will depend on your personal situation and future prognosis.
For example, if you have recently been diagnosed with a long-term health condition, it’s important to have a frank and realistic discussion with the medical professionals in charge of your care.
Explain that you are considering financial assistance to help you to pay for imminent care needs, and ask that they are honest and give a detailed explanation of the type of issues you may encounter in the future and the level of care that is likely to be required.
Irrespective of the option you look at, always ensure that the provider you are looking to use is authorised and regulated by the financial conduct authority,
You can read more about lifetime mortgages and drawdown lifetime mortgages here. There are also alternatives to equity release; you can find a number of guides and tools online that provide information on these.
Whilst the majority of plans are safe, you should check that the reversion company in question is a member of the financial conduct authority. This puts the reversion company under the obligation to obey certain terms surrounding fair consumer treatment.
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.
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.
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.
As you can see, there are risks with both courses of action. However, there is nothing to stop you looking at taking a mix of the two. Perhaps only take what you need as a lump sum and then take the rest as a regular income.
Get in touch with the lender if you think the features of this would be in your best interest.
When you reach a certain age, the opportunity to put aside money to pay for care in the future may have passed. Then, the range of options for investments that don’t affect your quality of life and inheritance can begin to narrow. Therefore equity release has become one of the most viable and attractive ways to fund long-term care – and with good reason.
Equity release schemes enable you to continue living in your home, and in some cases safeguards your ownership of it.
However, some people won’t be eligible for certain types of equity release schemes, and for others, it may not be a suitable possibility at all. Therefore, it is in your best interest to seek tailored advice.
It is essential that you use a specialist to secure your deal and take steps to get advice, such as debt advice. This will ensure that your best interest is always protected and that you don’t waste thousands of pounds on a bad deal.
There are two tools for you to consider.
We have created a directory of financial advisors that specialise in helping you find the right lifetime mortgage or home plan equity release plan provider. The directory has advisors listed from all over the country that you can call.
When you call, always check that the provider the financial advisor uses is regulated by the financial conduct authority, the prudential regulation authority, and is a member ERC. This will ensure they abide by all the necessary standards and increases your security.
If you do not feel confident in choosing an advisor, you can leave your details on our site below, and we will find an advisor for you. We do not charge for this service- it is absolutely free!
For more expert insights, debt advice, and professional assistance with the financial aspects of care, take a look at our related articles here. You may also like to browse our directory of financial professionals who specialise in later life and care provision and give one a call today!
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A home reversion plan is primarily suited to individuals over 65 looking for a solution to their finances. This article explains all you need to know.
With recent reduction in interest rates there are some really good Home Reversion deals available. The cheapest that we have seen in over 10 years! Contact us for free, in conjunction with Key Advice, to see what you could get.
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