How To Do A Home Reversion
If you’re looking for a bit of extra cash but are unsure where to turn, it may help to learn more about home reversion plans. Designed to help ageing seniors stay in place as long as possible, these tools give you some money from the home, which may mean it’s possible to remodel or even hire some private in-home care for a bit of extra help. What is a home reversion plan, and how does it work? This guide can help.
What Is a Home Reversion?
A home reversion plan is essentially a way to release the equity in your home. It gives homeowners who are at least ages 65 and older a way to sell part of their home to another company. They can either get a lump sum for that sale or they can get regular payments over time. The person retains the right to live in the home until they move into long-term care. At that point, the property is sold by the company, and the money is divided. Some of the money goes to pay back the loan, and the remaining funds go into the homeowner’s estate. The key term here is reversion, meaning some ownership reverts back to the original person.
Why Home Reversion Is So Popular
There are several different reasons so many people are turning to home reversion plans. One of the biggest, though, is the fact that they give retirees an easy way to access the equity they have in their home and turn it into cash without actually having to move out. This can be incredibly appealing for older homeowners because often they want to stay in surroundings they love whilst still maintaining their independence.
Another reason these tend to be popular plans is the fact that they offer homeowners almost instant access to a large lump sum of cash. That money can be used for almost anything. Whether the homeowner wants to use it for home repairs, ongoing expenses, or even just to take the long holiday they’ve spent their lives planning, anything is possible.
One last reason this has become such a popular option among homeowners is that it doesn’t work the way a more traditional loan does. There are no monthly payments to be made. Instead, no money is due back to the company that made the loan until the homeowner transitions to long-term care, so it’s a way to get money without taking on any real additional debt.
How Does A Home Reversion Work?
Most home reversions work like this. The homeowner contacts a company that specialises in home reversions. There aren’t a lot of providers to choose from, but you’ll want to do a bit of research to make sure you select the company that is right for you. You’ll need to consult with an adviser who has an equity release certification, then you’ll need to have a valuation of your property. That cost can vary from provider to provider. The company with which you’re working will then recommend what might be the right plan for you.
It might work a little like this. Imagine you’re an 80-year-old homeowner who has a home that is currently valued at £250,000. You talk to a home reversion provider, and after some discussion agreed to sell 60% of your property. You gain £150,000, and you can continue to live in your home as long as you’d like. Once you move into long-term care, however, the home reversion provider will sell your home for the value – of £250,000, in this case. They then get 60% of the proceeds, and the homeowner’s estate gets the remaining money.
The Benefits Of A Home Reversion
There are many great benefits to a home reversion plan, and that’s one reason they’re so attractive to people today. The biggest benefit is that the homeowner gets instant access to cash. A home reversion plan offers a lump sum or monthly payments, and if the homeowner has a lot of equity built up in the home, that can mean a substantial sum of cash. The money can be used on almost anything, too, whether the homeowner is looking for some help at home and needs a bit of extra cash to pay for that level of care or they’d just like to be able to spend a bit more money in retirement.
Money itself is a real advantage, but there are other advantages, too. The fact that this doesn’t work like a traditional loan is a huge draw for many people. With a traditional mortgage or even a personal loan, there are monthly payments to help fulfil the balance of a loan. A home reversion, though, doesn’t work that way. Instead, the homeowner doesn’t have to make any monthly payments, and that’s a huge help for people who are already often living on a fixed income. They get the money they need without really ever having to repay it.
The fact that you can stay in your home after you take out this loan is another big benefit for many people. Studies have shown that it’s easier for people to maintain their independence when they’re in surroundings that they know, which is why the ageing-in-place movement has become so popular. A home reversion plan can provide exactly that. The homeowner can stay in their own space as long as possible and still enjoy the proceeds of the equity at the same time.
For many, another benefit is the fact that this type of loan doesn’t just vary from other loans in the fact that there are no repayments to make, but also in one other key way. There are no credit checks required to obtain a home reversion plan. If a homeowner has a poor credit history but a solid amount of equity built up in the home, they’re likely to qualify for a home reversion.
The final benefit is maybe the biggest. The homeownership itself doesn’t change hands with this kind of plan. The homeowner has full legal ownership of the property until they move into long-term care.
The Disadvantages Of A Home Reversion
For as many benefits as come with home reversion, there are some drawbacks to this kind of plan, too. One of the biggest drawbacks for many homeowners is that they reduce the inheritance that they will leave behind. Because the home reversion company will get part of the money when the property is sold, less money often goes to children and grandchildren, and that can be frustrating.
That loss can only be expanded upon if the property itself falls in value with the ups and downs of the real estate market. Property values change on a routine basis, and a homeowner’s estate may potentially become even less valuable if property values fall before or at the point the property is sold.
Inheritance concerns aren’t the only potential drawback of this kind of product, though. There are also some fairly high upfront costs. To qualify for a home reversion program, a homeowner must pay the legal fees involved as well as any broker fees that are part of the equation. Additionally, they must also pay valuation fees, and all of those fees can add up over time. They can take thousands of pounds out of the money a homeowner was initially supposed to receive as part of the plan.
One additional drawback is the fact that home reversion plans are a bit inflexible. They’re only available to people over the age of 65, and once they’re in place, the homeowner can never change the terms of the agreement. In other words, the percentage of the property they sold can’t be bought back by anyone, so once the agreement is signed, the homeowner must live with any potential consequences. Many ask, “Can I sell my house if I have an equity release loan?” The simple answer, here, is not. You’re stuck with the paperwork and the terms once you sign them.
How Much Can You Get Through a Home Reversion Scheme
There’s no one set amount of money you can get through a home reversion plan. It depends a bit on what you’re looking for, how much your home is worth, and how old you are. Most home reversion plans will loan you more money for more valuable property. Naturally, you’ll get more money, too, if you sell a higher percentage of your property. Additionally, the older you are, the more money you can get out of the property itself.
In general, however, you can choose to sell between about 30% and 60% of the property to a home reversion plan provider. Keep in mind, though, that you don’t typically get the market rate for the share of your home. The reason for that is fairly simple – you’ll never pay any interest on the money you get. That’s not repaid until after you move into long-term care, and the home reversion provider with whom you work has no real sense of when that will happen and what might happen to home prices in the meantime.
Are There Alternatives to Home Reversion Plans?
If you’re looking for a good way to access the equity in your home, but you’re not quite sure a home reversion plan is right for you, you do have several other options available. A lifetime mortgage is one of the most popular alternatives to home reversion plans in the UK. With this kind of loan, you still get a lump sum or regular payments on your home, and you still don’t have to make any monthly payments back to the company that issued you the loan. The real difference with this kind of loan, though, is the fact that there is interest charged on the loan, and it must be repaid when the homeowner moves into long-term care.
Another great option many people consider when they think about a home reversion plan is an equity release loan. This kind of loan is a catch-all term for several other kinds of loans that let homeowners access the cash in their homes without having to leave. Typically these kinds of loans come in one of two forms. The first is a simple lump sum equity loan. It offers you access to the money you’ve built up in one lump sum. The other type is a home equity line of credit. This works a bit like a credit card, but the money you’re spending is the equity in your home. With both of these kinds of loans, however, you will have to make monthly repayments. On top of that, you’ll need good credit to qualify for this kind of loan.
The last way to access the equity in your house is to sell it and downsize. While you will have to find somewhere else to live, you won’t have to worry about a loan of any type, and once the process is complete, the money is yours to keep, spend, or put away for your heirs someday.
Before you decide on the right type of equity release product to meet your needs, it’s essential that you talk with a financial advisor to learn more about the variety of options you have at your disposal. Each comes with its benefits and drawbacks, and understanding more about them is nothing short of a must.
Understanding Equity Release
Equity release is a big part of home reversion loans, but if you don’t quite understand the concept, don’t worry. You’re not alone. When you initially took out your mortgage, you deposited the home, and a lender gave you the rest of the money to purchase the home. Over time, you slowly begin to pay the balance of your loan down. That’s called equity. It is the difference between the value of the property itself and what you owe to the lender. To find out how much equity you currently have in your home, you just subtract the outstanding balance of your mortgage from the property’s market value. Often it’s fairly easy to find a rough estimate of the value of your property just by plugging a few details into a site like Rightmove or Zoopla these days.
Here’s a quick example that may help you clear things up a bit. Imagine your property is currently valued at £300,000. You currently owe just £125,000 on your mortgage. The equity you have in your home right now, in that situation, is $175,000.
Wondering why it matters? Home equity can be quite valuable as an asset. You can use it to obtain products like these, but you can also simply pass on quite a gift to your children and grandchildren as a result of the equity you’ve managed to build up in your home.
How Are Home Reversion Plans Regulated
In the UK, home reversion plans are regulated by the Financial Conduct Authority, sometimes called the FCA. Several regulations surrounding these plans, too. First, they have to offer customers like you clear, accurate information about the plans themselves. They must legally include all of the costs and risks in any presentation about the benefits of this kind of loan. Second, they have to give any potential customer a Key Facts Illustration (or KFI). It is usually a document that offers a clear summary of the key features of the home reversion plans they offer, and a closer look at just how much money you might be able to get from this kind of plan. Additionally, they have to make sure you have the chance to get independent advice from a financial advisor before you enter into the plan. Finally, you have to wait for a 14-day cooling-off period to make sure you don’t want to change your mind and cancel the plan in which you’re interested.
Regulations like these are mandatory, and they help keep people safe, as it provides a bit more information about the plans and whether or not they might be right for a given individual.
Finding Professional Advice
Interested in learning more about a home reversion plan, but you’re not quite sure where to turn? There are several different places you can turn to when you need a little more information. One of the best ways to learn more about these plans is through an independent financial advisor. These are professionals who can offer you quite a bit of information on lots of different financial matters and includes any interest you may have in a home reversion plan. They should be able to tell you more about the different kinds of home reversion plans out there, the costs of those plans, and the risks that come with them.
Equity release advisers are another good place to turn. These individuals tend to specialise in different kinds of equity release products, so they can offer you a detailed look at the different home reversion plans available to you as well as the other options you may have. In every case, though, they’ll help you see things more clearly when it comes to a cost-benefit analysis.
You may also want to talk to your solicitor. They are usually trained in home reversion plans, and that can help you learn more about any legal documentation you may need and the agreement you’re signing when you complete the home reversion agreement paperwork.
In some cases, it may be worth it to check with your local council for a bit more information, too. Most have free services that help you learn about a variety of different equity release schemes, and home reversion plans are usually among those.
No matter where you eventually decide to turn for this advice, make sure you turn to a professional you truly trust. You want someone qualified and experienced, as well as completely independent. The last thing you want is someone trying to sell you a product when you’re just trying to learn more about your options.
What’s Right For You?
Home reversions aren’t right for everyone, and if you’re trying to decide on the best way to get some extra cash, this may be one way you want to consider. You do, though, have several other options. Some ask, “Can I sell my home and still live in it?” There are some great schemes out there that work exactly like that. Similarly, selling a house and renting instead may be the right way to move forward. The simple reality is that you won’t know what the right step for you may be until you get the right advice to meet your needs. Do some reading of titles like “7 Reasons You Should Rent a Home in Retirement,” and “How to Sell Your Home for Free,” then book a consultation with a financial advisor. You’ll have a much better way to understand what they think you should do for your project.
