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What is a Home Reversion Scheme?

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So, what is Home Reversion / Equity Release?

 

Using a Home Reversion or Equity Release Scheme, the property owner sells the whole, or a share of the home to a financial institution. The firm will pay either a lump sum or a monthly income (or a combination of the two). The property owner then becomes a tenant of the financial institution either rent-free or at a very low rent until they die.

When the property is eventually sold, the financial institution takes its share of the proceeds. For example, if it had bought a 50 percent share in the property, it would receive 50 percent of the sale. Because the original property owner will continue to live in the property, possibly for many years, the financial institution will not pay the current market value for the share of the house that it is buying. If you were to sell the whole of your property to a financial institution under a home reversion scheme, you could expect to receive between 30 and 60 percent of the market value. The actual percentage will depend on how long the financial institution's actuaries expect you to live; it will depend on your age, sex, smoking habits and state of health.

Home reversion/Equity release - There are loads of different types of schemes 

There is no set Reversion scheme with policies differing from provider to provider. Also, as competition increases in the Equity Release market new ideas and twists to the different schemes are being offered all the time. It's therefore imperative that people interested in Equity Release do as much homework as possible and check out many different providers along with their costs and small print. For a list of Equity Release Providers Click Here.

  • Some lenders will only provide the capital released in the form of extra income, an 'annuity'
  • Others may give you the choice of having a lump sum or both
  • When you (or in the case of joint applicants - the last survivor) die the lending company receives back the same percentage share, but at the sale value at the time of death - including any growth in the property's value
  • Some schemes allow you to benefit from an increase in property values while others do not
  • Some will allow you to sell 100% of your property, while others limit it to only 90%

    The disadvantage of a Reversion scheme is that you may miss out on any increase in the value of the portion you have sold. You are unlikely to be allowed to buy back your property and even if you can you may have to pay the top market price. This could be very awkward as you fight over values and pay out costly legal fees.

    • Home reversion/Equity release - Advantages of these schemes 

  • The original property owner will know the percentage of the property (but not the value) that they will be able to bequeath to their heirs.
  • If the whole property was not sold by the original property owner, monetary value will continue to accrue to them from any increases in the price of the property.
  • If the owner has equity remaining in the property, further shares can be sold at a later date.
  • The original property owner will not have to make any repayments during their lifetime.

    • Home reversion/Equity release - Disadvantages of these schemes 

  • A financial institution will insist on purchasing a property at considerably below its market value.
  • Financial institutions are sometimes fussy about the properties they will purchase because they need to be good long-term investments in order to be viable.
  • If a property owner dies soon after selling all or part of their home, they could have lost a large sum of money with little benefit to themselves; some financial institutions will offer rebates to families if the property owner dies within the first few years of a home reversion scheme.



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    Home reversion/Equity release - In summary... 

  • In a home reversion scheme, the property owner sells a share or all of their home to a financial institution;
  • With a home reversion scheme, a property owner will not have to make any repayments during their lifetime;
  • Financial institutions will only purchase properties that they consider to be sound, long-term investments for a home reversion scheme.

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