Home Reversion Guide
Your home is not just a place to live; it’s a haven of memories, a symbol of your hard-earned accomplishments, and a sanctuary that holds a special place in your heart. As life’s chapters unfold and circumstances change, the question of how to leverage the value tied up in your property while still preserving the comfort and familiarity of your home becomes increasingly relevant. Enter the intriguing world of the Home Reversion Scheme in the UK – a financial avenue that gives homeowners a great way to access their property’s equity without the burden of selling or moving.
In this blog post, we delve into the intricacies of the Home Reversion Scheme, shedding light on its mechanisms, benefits, and potential considerations. Whether you’re approaching retirement, seeking to fund an ambitious venture, or simply looking for financial flexibility, understanding how this scheme operates can be the key to making informed decisions about your future. Join us as we demystify the concept, explore its advantages and drawbacks, and provide you with the knowledge you need to navigate the world of home reversion in the UK.
Embark on a journey that empowers you to make sound financial choices while preserving the sentiment and security of your cherished abode. Let’s unravel the layers of the Home Reversion Scheme together and unlock the possibilities it holds for shaping your path ahead.
What Is Home Reversion?
A home reversion plan, which is also known as a home-for-life plan or as a reversion mortgage, is an equity release scheme. In this scheme, you would sell all or part of your home to a company. The company then gives you a cash lump sum or possibly regular income in return. The home or the portion of the home that you sold then belongs to someone else. However, you have the right to live there under a lifetime lease. A home reversion scheme gives you access to funds that are based on the percentage of your home’s market value, which is typically between twenty per cent and sixty per cent.
What Are The Benefits Of Home Reversion?
A home reversion plan will enable you to continue to live in your home without paying rent or with a fixed rent or an increasing rent amount. The amount will be dependent upon the terms of the agreement. Thus liferent problems are then solved. The purchaser of the property is not allowed to sell the home until you die, you move into care or you permanently vacate the property.
A Few Home Reversion Considerations
Of course, there are things to consider. In this case, you need to take into consideration that home reversion plans are higher-risk options than standard mortgages. Further, they can have implications when it comes to taxes, benefits, inheritance and long-term financial planning. As with any other housing decision, it will be important to seek financial advice when considering a home reversion plan or any other equity release scheme to be fully informed and be able to decide if it is right for you and your needs.
If you choose to go the route of home reversion, you may have to incur property maintenance fees, monthly rental payments, pay an arrangement fee to the provider, and pay fees to the adviser for their professional advice and their help in setting the scheme up for you. Payment of valuation fees will be necessary to decide the sale price of your property. Legal fees will need to be paid so that you can have an independent professional review the lease terms to be sure that they are legal and fair.
If home reversion is something you are considering and you desire to know whether or not you can still sell your home, you must understand that your home, once the home reversion scheme is complete, belongs to someone else and you will likely not have full ownership. But, some home reversion schemes may allow a transfer of the arrangement if you decide you want or need to move.
If you need a lump sum or some type of income right now, then a home reversion plan may be right for you. This is especially true if you want to remain in your home and you do not have children or other family members that need to inherit your home at its full value. Be sure to note, though, that you will have the full responsibility of keeping the home maintained while you are still living in it.
The lifetime lease is the component of the home reversion scheme that allows you to continue dwelling in your property until you move out or until you die. To have the lifetime lease component in place, you may have to pay a monthly rental payment so that you can have access to a larger lump sum from the sale of your home.
Who Uses Home Reversion?
Home reversions are typically sought out by older individuals. This allows them to release the equity from their property. Before you go all into the home reversion scheme, be sure you are completely aware of potential risks and implications.
Because you are selling part or all of your property, a home reversion scheme is not right for everyone. Remember, this means that you do not fully own the home anymore. You must be aware that even though you have sold all or part of your property in the home reversion scheme, you may still be liable to pay other costs including ground rent or chief rent.
There will be a term and reversion valuation, which will determine the amount that you can sell your home for under the home reversion scheme. Thus, you must take the time to get an independent valuation done. Having the independent valuation will ensure that you can sell your home under the home reversion scheme for a fair price as it is highly suggested not to accept a valuation which has been suggested by the reversion company.
Home reversion plans are positive in that they allow you to live rent-free in your home while you are receiving the cash lump sum or the regular income that was agreed on by the buyer of the property.
Before You Decide Home Reversion Is Right For You, Consider These Aspects
Because there are both benefits and drawbacks to a home reversion scheme, you’ll want to think carefully about this decision. Here are some important factors to consider about home reversion plans:
- Eligibility: Not everyone is eligible for home reversion plans. Home reversion plans are usually available for those who are sixty-five years or older. Some providers may consider applicants who are as young as fifty-five years. The older your age when you start a home reversion plan, the closer to the property’s fair market value you are going to be able to receive.
- Inheritance Considerations: As previously stated, when you enter a home reversion plan, you no longer fully own your home or a part of your home depending on what percentage you sold. Thus, when the whole property is sold in the future, the proceeds will have to be split between you (or your estate) and the reversion provider. The percentage will depend on the percentage of ownership on each side. Thus, any beneficiaries you have will inherit less from the property than if they were to sell it in a traditional sale.
- Impact on Inheritance Tax: If you decide to enter into a home reversion plan, there may be implications regarding inheritance tax planning. The value of your estate decreases as you sell a portion of your property to the reversion provider. Thus, you may be potentially reducing the inheritance tax liability for your beneficiaries. A tax specialist can give you sound advice regarding the inheritance tax and a home reversion scheme and how it will impact your beneficiaries in your situation as all situations are slightly different.
- Flexibility: There is less flexibility in a home reversion plan when comparing it to other equity release options such as lifetime mortgages. Changing or terminating the plan, once you have agreed with the reversion provider can be very challenging. Thus, you must consider your decision with much care.
- Impact on Benefits: Your eligibility for benefits could be greatly impacted by receiving a lump sum or regular income from entering into a home reversion plan because it may be considered as capital or as income. Before you enter a home reversion scheme, you need to discuss your options and the impact with a financial adviser so that you are fully and well informed.
- Medical Underwriting: There are home reversion providers that take into account your health or medical conditions when offering up their terms. They may offer enhanced terms based if you have certain health issues. The home reversion providers may offer a higher percentage of the property’s value or offer you a more favourable arrangement.
- Future Property Value: When you agree to the terms and enter into a home reversion plan, you are selling that portion of your home at the current fair market value. Be sure to consider that if the property increases in value in the future, it will be the reversion provider who benefits from that increase, as your share will remain at the fixed rate that was agreed upon.
- Independent Legal Advice: It is not just advised that you seek independent legal advice, but it is a legal requirement that you seek out legal advice before you enter into a home reversion plan. A solicitor will then carefully review the lease terms and make sure that you completely and completely understand the agreement they are making with the reversion provider.
- Provider Regulation: There are regulations put into place by the Financial Conduct Authority (FCA) in the UK for home reversion plan providers. These regulations are put into place to provide certain protections for consumers. Even with the regulations in place, it is essential that you thoroughly research providers and choose one who is established and who is reputable.
- Joint Homeowners: Joint homeownership means that all parties who own the home must agree to the home reversion plan. If one of the homeowners moves into long-term care or if they pass away, then the plan will generally continue for the remaining homeowner(s). This includes ownership with a spouse or partner. In this case, the surviving homeowner can remain in the property under the terms of the plan that was set in place.
- Potential Tax Implications: The cash lump sum that is received from a home reversion plan is typically tax-free money. However, that does not mean that there will not be other potential tax implications regarding other areas of your financial planning. Therefore, it is highly recommended to gain advice from a tax specialist to learn what other implications could come from entering a home reversion plan.
- Home Reversion vs. Lifetime Mortgage: A home reversion plan is different from a lifetime mortgage. A lifetime mortgage is another type of equity release scheme. If you enter a lifetime mortgage, you are essentially borrowing against the value of your own home. In this scheme, you continue to retain full ownership of your home. Then, you repay the borrowed amount as well as the interest when you sell the property in the future or when the home is sold after you pass or after you move into long-term care. In comparison, a home reversion plan is where you sell a portion of or all of your property and thus you completely relinquish the ownership to receive a lump sum or regular income.
- Moving Homes: If you need to move to another property and you are on a home reversion plan, this might be possible. You might be able to transfer your arrangement to a new property, based on the provider’s terms and conditions that were set forth at the beginning of the agreement. The new property will be subject to meeting the eligibility criteria as well as the percentage of the new property sold would be based on its current market value.
- Inflation and Rising Property Prices: Home reversion, when compared to other investment options, might not provide the same level of protection against rising property prices or inflation. The reversion provider’s share is fixed, so any increase in the property’s value over time might not benefit them.
- Live rent-free: Some home reversion plans offer the opportunity for a rent-free agreement, meaning that you can live in the property and you do not have to pay any rent during the rest of your lifetime. But, you will still be responsible for covering the cost of all maintenance as well as any expenses that are about the property itself.
- Repayment Options: In a traditional mortgage, monthly repayments are required. A home reversion plan differs in that there are no monthly repayments to be paid. Instead, the home reversion provider can recover their investment money when they sell the property upon your death or upon you moving out.
- Remaining Equity: If you enter a home reversion plan in which you retain a portion of your property’s equity, you may still be able to utilise other equity release products or refinancing options to release additional funds in the future.
- Home Reversion Providers: As with any other market, the market for home reversion plans can vary. Therefore, be sure that you are comparing different providers so that you can find the plan that best meets your needs. Remember to look for providers who are regulated by the Financial Conduct Authority and who are reputable with fair fees and whose terms are conducive to your desires.
- Independent Financial Advice: As with any other home buying and selling decisions, you should look to an independent financial adviser when you are thinking about entering into a home reversion plan. They will be able to help you by looking at your circumstances and then fully explain to you what the potential risks are and how you may benefit. With their advice, you will be sure you are making an informed decision.
- Cooling-Off Period: When you enter into a home reversion plan, you need to understand that it comes with a cooling-off period. During this time, you have the right to change your mind and completely cancel the agreement with no penalties. The length of this period varies. It is typically about fourteen days from the date of completion, so be sure that you know how long your cooling-off period is when you agree with a home reversion provider.
- Early Repayment: Home reversion plans do not require you to make regular payments. However, some providers may offer the option of an early repayment or even a partial repayment. Note that early repayment could incur some additional costs or even penalties. Be sure, when considering this as an option, that you check carefully all of the terms and conditions of the plan.
- Financial Assessment: A financial assessment may be completed by the home reversion provider to be sure that you can afford to continue to live on the property. In this financial assessment, they will consider things like ongoing maintenance costs as well as other expenses associated with the property that you will be responsible for. This financial assessment is done to protect both parties involved in the agreement.
- Moving to Long-Term Care: Once you have entered into the home reversion plan and you have to move into long-term care, usually the home reversion plan will end and the property will be able to be sold, thus having a for house sale sign put up. Then the provider’s share is paid. There are some provisions offered by some providers that are for an extended period in the property when you are in long-term care where there is additional time that must elapse before the property gets sold.
- Independent Equity Release Council: Many of the home reversion plan providers, who are reputable, are members of the Equity Release Council. Their membership ensures that the home reversion plan provider adheres to industry standards and industry principles. Included in the standards that they must adhere to is the “no negative equity guarantee,” which essential is there to make sure that you will not ever have to owe more than what the property is valued at.
- Property Condition: Your property’s condition is one of the factors that home reversion providers take into serious consideration before making you an offer. They will only make that offer if necessary, repairs and renovations are done to satisfy their requirements.
- Impact on Future Borrowing: Remember that once you enter into a home reversion plan, you no longer fully own your property. Thus, entering such a plan could impede you or put an obstacle in your way to being able to secure any future borrowing against your property.
Should You Consider A Home Reversion?
To sum it up, a home reversion scheme is for homeowners to be able to gain an equity release to receive quick funds from their property and allows them to continue living in the property. But, when considering entering this plan, it is vital to understand all of the details, all of the risks and any implications that the plan may have on you or your beneficiaries in the future. This is a significant financial decision that has long-term implications for all involved and all options should be explored before making a decision. Carefully think about both the pros and cons of all options. Seek qualified professionals to help you understand all sides of your options and to help guide you in making your decision. Should you decide to go the route of a home reversion plan, be sure that you use a reputable company and that you understand all of the terms before agreeing to them.
What Percentage of My Property Will I Sell? The percentage you sell depends on various factors, including your age, the value of your property, and the terms of the scheme. Generally, the older you are, the larger the percentage you can sell.
Can I Leave My Property to My Heirs? If you sell a portion of your property through a home reversion scheme, you’re effectively giving up a portion of the property’s value. This could impact the inheritance you leave to your heirs, as they would only inherit the remaining share of the property.
Can I Move or Downsize After Joining the Scheme? Some schemes might allow you to move or downsize, but it’s essential to check the terms and conditions beforehand. If you decide to move, the reversion company’s share will be calculated based on the value of the new property.
What Happens If I Live Longer Than Expected? If you live longer than anticipated, you’ll continue to reside in the property without paying rent. The reversion company will only receive their share upon the eventual sale of the property.
Can I Change My Mind After Joining the Scheme? Depending on the terms of the contract, some schemes might allow you to reverse the arrangement within a specific timeframe, while others may not offer this option.
How Is the Value of My Property Determined? The value of your property at the time of the scheme’s initiation will play a significant role in determining the percentage you sell and the lump sum or income you receive. A professional surveyor usually assesses the property’s value.
Are There Fees Involved? There are usually some costs associated with setting up a home reversion scheme, including valuation fees, legal fees, and administrative costs. These should be clearly outlined in the scheme’s documentation.
How Is Tax Handled in Home Reversion Schemes? Generally, the lump sum you receive from a home reversion scheme is tax-free. However, the money you receive could impact any means-tested benefits you’re receiving or might receive in the future.
What Happens If the Property’s Value Increases? Any increase in the property’s value will affect both the remaining value that can be inherited and the reversion company’s share upon the eventual sale.
What Happens If the Reversion Company Goes Out of Business? Before entering a scheme, it’s wise to check what safeguards are in place in case the reversion company faces financial issues or goes out of business.
Can I Rent Out Part of the Property? Generally, home reversion schemes require that you live in the property as your main residence. Renting out parts of the property might violate the terms of the scheme.
How Long Does a Home Reversion Scheme Last? The scheme lasts until you pass away or move into long-term care. At that point, the property is sold, and the reversion company receives their share of the proceeds.
What If I Want to End the Scheme Early? Some schemes might have provisions for ending the scheme early, but it’s essential to understand the potential penalties or consequences.
Can I Use the Money I Receive for Anything I Want? Yes, the money you receive from a home reversion scheme is usually yours to use as you see fit, whether it’s for daily expenses, investments, or any other purpose.