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What Is A Home Reversion Plan?

Property Saviour » Equity Release » What Is A Home Reversion Plan?

If you need some extra money and don’t know where to turn, home reversion plans may be the answer. They’re designed to help elderly people remain in their homes for as long as possible, providing them with funds that can be used to renovate or pay for private in-home care.

But what is a home reversion plan, and how does it work? This guide will provide all the information you need.

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What Is a Home Reversion Plan?

A home reversion plan provides people aged 65 and over with a way to access equity in their homes. They can receive a lump sum or regular payments over time for selling part of their property to another company.

The homeowner retains the right to live in the home until they move into long-term care. When that happens, the company sells the property and the proceeds are divided. Some of the money is used to pay back the loan, and the remainder goes into the estate of the homeowner.

Reversion is the key term here, meaning some of the ownership reverts to the original homeowner.

Why Home Reversion Is So Popular?

Many retirees are turning to home reversion plans for several reasons. Primarily, they provide a way for these homeowners to access the equity in their homes and turn it into cash without having to move out.

This is an attractive option for older homeowners who want to retain their independence while staying in a place they love.

The plans also offer almost instant access to a large lump sum of money, which can be used for anything from home repairs to taking a long-awaited holiday.

It is worth noting that these plans don’t work like a traditional loan; there are no monthly payments to be made, and no money is due back until the homeowner moves into long-term care, allowing them to receive funds with debt and interest deferred into the future.

How To Do A Home Reversion
A home reversion plan provides people aged 65 and over with a way to access equity in their homes.

How Does A Home Reversion Plan Work?

Most home reversions work like this: homeowners first contact a company that specialises in home reversions. Though there aren’t many providers to choose from, it’s important to do your research to find the right company for you.

You will need to talk to an adviser who has an equity release certification and get a valuation of your property. The cost of this valuation can differ depending on the provider. Then, the company you’re working with will advise you on the best plan for your needs.

As an example, let’s say you are an 80-year-old homeowner with a home that is currently worth £250,000. You talk to a home reversion provider, and after a discussion, you agree to sell 60% of your property. You receive £150,000 and can continue to stay in your home for as long as you’d like.

Once you move into long-term care, the home reversion provider will sell your home for its value of £250,000. From the proceeds, the provider gets 60%, and the remaining money goes to the homeowner’s estate.

However, you/your estate will be paying compound interest on that loan, and there may not be much left if you intend to gift inheritances to your children.

The Benefits Of A Home Reversion

Home reversion plans provide a great opportunity, and that’s why they’re so popular today. The main benefit is the immediate access to cash.

Depending on the amount of equity in the home, a lump sum or monthly payments may be available. This money can be used for various purposes, such as financing home care or enhancing retirement.

What makes this type of loan different from others is that there are no monthly payments. This is very beneficial for people on fixed incomes. Plus, the homeowner can stay in their home, which is important for maintaining independence.

Another appealing factor is that no credit checks are necessary. So, even if the homeowner has a poor credit history but a significant amount of equity in their home, they may still qualify.

Finally, the most advantageous aspect is that the homeowner retains full legal ownership of their property until they move into long-term care.

Overall, home reversion plans offer a great way to access cash and remain in the home.

What are the disadvantages of home reversion?

For as many advantages as home reversion offers, there are some drawbacks to consider, too. One of the most significant disadvantages for many homeowners is the reduction of their inheritance.

This is because when the property is sold, the home reversion company will get part of the money, leaving less for children or grandchildren. This situation can become even more unfortunate if the property value decreases before the property is sold.

One major downside of a home reversion scheme is that you typically only receive a maximum of 60% of your home’s market value, and sometimes even less (as little as 30%). Additionally, the home will need to be vacated shortly after your death, often within a month.

In addition to this, there are also high upfront costs. To qualify for a home reversion plan, homeowners must pay legal and broker fees, as well as fees for the valuation. All these fees can add up and take a large portion of the money initially planned to be received.

Another disadvantage of home reversion plans is their inflexibility. They are only available to those aged 65 or over, and once the agreement is signed, it cannot be changed. This means that the percentage of the property sold cannot be bought back, and homeowners must accept whatever consequences arise from the agreement.

People may ask, “Can I sell my house if I have an equity release loan?” The simple answer is no. Once the paperwork is signed, homeowners must abide by the terms.

How Much Can You Get Through a Home Reversion Scheme
Typically, you can sell between 30% and 60% of your property to a home reversion plan provider. Keep in mind, however, that you don't get the full market rate for the share of your home.

How Much Can You Get Through a Home Reversion Scheme?

The amount of money you can get through a home reversion plan varies. It depends on your needs, the worth of your home, and your age.

Generally, the more valuable your property is, the more money you can get. Additionally, if you are older, you can usually get more money from the property.

Typically, you can sell between 30% and 60% of your property to a home reversion plan provider. Keep in mind, however, that you don’t get the full market rate for the share of your home.

This is because you don’t pay any interest on the money you get and the provider doesn’t know when you will move into long-term care or what will happen to the home’s value in the meantime.

Are There Alternatives to Home Reversion Plans?

If you’re looking for a way to access the equity in your home but are not sure a home reversion plan is the best fit, there are other options. Lifetime mortgages are the most popular alternative in the UK.

With this type of loan, you still get a lump sum or regular payments without having to make any monthly repayments. The difference is that interest is charged on the loan, and it must be repaid if you move into long-term care.

Equity release loans are another option. This is a broad term for various loans that let homeowners access their cash without leaving. These loans come in two forms – a lump sum equity loan and a home equity line of credit.

The former offers you access to your money in one go, while the latter works like a credit card, using the equity in your home. However, you need to make monthly repayments with both types, and good credit is required.

The last way to access equity is to sell the property and downsize. This will require you to find a new home, but the money is yours to keep, spend, or pass on to heirs.

Before deciding which equity release product is best for you, talk to a financial advisor. They can provide info on the various options and their pros and cons.

Understanding Equity Release

Equity release is an important part of home reversion loans, and if you don’t quite understand it, don’t worry – you’re not alone. When you took out your mortgage, you put up the property as a deposit, and the lender gave you the remainder of the money to buy the home.

Over time, you start to pay off the balance. This is called equity, which is the difference between the value of the property and what you owe the lender.

To find out how much equity you have in your home right now, subtract the remaining balance of your mortgage from the property’s market value. You can easily get an approximate estimate of the value of your property by entering a few details into websites like Rightmove or Zoopla.

Let’s look at a quick example to clarify things. Suppose your property is currently valued at £300,000, and you owe £125,000 on your mortgage. The equity you have in your home is then £175,000.

You may be wondering why it matters. Equity can be a valuable asset and can be used to obtain products like these or can be passed on as a generous gift to your children and grandchildren.

How Are Home Reversion Plans Regulated
These regulations are mandatory and keep people safe, providing them with more information on the plans and if they are suitable for them.

How Are Home Reversion Plans Regulated?

In the UK, home reversion plans are regulated by the Financial Conduct Authority (FCA). To protect customers, there are several regulations regarding these plans.

  1. Customers must be provided with clear and accurate information on the plans. All costs and risks associated with the plans must be included in any promotional material.
  2. Customers must be given a Key Facts Illustration (KFI), which outlines the key features of the home reversion plans. It also gives an estimate of how much money the customer can get from the plan.
  3. Customers must be given the chance to seek independent financial advice before entering into the plan.
  4. Finally, customers must be given a 14-day cooling-off period, allowing them to change their minds and cancel the plan if they wish.

These regulations are mandatory and keep people safe, providing them with more information on the plans and if they are suitable for them.

Finding Professional Advice

Are you interested in learning more about a home reversion plan, but you’re not sure where to turn? There are several options you can explore for more information.

One of the best sources of information is an independent financial advisor. These experts can provide lots of information about home reversion plans, including the cost, risks and different types available.

Equity release advisers are another great place to get more information. They specialise in equity release products, so they can provide a closer look at the different home reversion plans available and other options you may have. They can also help you with a cost-benefit analysis of each option.

Talking to your solicitor is also a good idea. They are usually trained in home reversion plans, so they can help you understand any legal documents and the agreement you’ll be signing.

Your local council may also be able to provide more information. Most councils offer free services that provide information about equity release schemes, including home reversion plans.

Whichever professional you choose, make sure you pick someone you trust. Look for someone qualified, experienced and independent. It’s important to get information, not sell a product.

What’s Right For You?

Home reversion isn’t for everyone, and if you’re deciding on the best way to gain extra money, this could be an option to consider. However, there are other options available. People often ask, “Can I sell my home and still live in it?”

Some great schemes work this way. Alternatively, selling a house and renting instead could be a good choice. The truth is, you won’t know the right option for you until you get some advice that meets your needs.

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