Home Reversion

  • Unlock your home’s equity
  • Homeowners aged 60/65+
  • Stay in your home
  • Tax-free cash
  • Lump-sum
  • No monthly repayments
Equity Release Mortgage

What is a Home Reversion Plan?

A home reversion plan is not a loan. Instead, you sell a portion (or all) of your home in exchange for a tax-free, lump-sum or regular payment. You are granted a lifetime lease (tenancy) which allows you to live in your home, rent-free until you die or go into long-term residential care.

Home reversion was the original form of equity release but it’s been very much superseded by the lifetime mortgage. This is because, as we shall see, home reversion has some significant weaknesses that gave it a poor reputation. The lifetime mortgage has addressed many of these. Both home reversion and lifetime mortgages are regulated by the Financial Conduct Authority (FCA).

A Lifetime Mortgage?

Consider a lifetime mortgage rather than home reversion because:

  • You own 100% of your home
  • You can access equity earlier
  • More flexible in changing circumstances
  • More cost-effective
  • Less financial risk

About Lifetime Mortgages

How does Home Reversion work?

The video below explains the basic working of a home reversion plan and how this compares to a lifetime mortgage.

The home reversion company will buy all or a portion of your property. If you sell part of it then you and the reversion company will co-own your home. If you sell it all to them then you no longer own your home. Either way, you are granted a long-term tenancy to live in the property until you die or move into residential care.

The important thing to understand is that you will not get the market value for the house. In fact, you may receive only 20% to 60% of the value you expect for the portion you sell. This is one of the major drawbacks of home reversion. This low percentage is driven by the risk associated with house prices and the fact that the reversion company does not know for how many years it’s cash will be tied up in what was your property.

The older you are when you start a home reversion scheme the greater the proportion of the market value you will be offered for your home. This is why such plans are more suitable for those aged over 70.

 

The cost of Home Reversion: an example

The discount to the market value that home reversion companies will “charge” is greater the younger you are. So, you’ll need to sell a greater share of your property to get the same £000s sum as an older person living in a similar house.

Imagine a 65-year-old couple living in a £250,000 house. They want to borrow £50,000 and expect to have to sell 20% of their property. However, the reversion company may only offer £50,000 for a 70% share (worth £175,000 at market prices).

Assuming that house prices rise at 2% each year then after 20 years, the house would be worth £372,000. The couple’s remaining 30% share would be worth £111,000 and the reversion company’s 70% would be £261,000. The deal has enabled the reversion company to turn £50,000 into £261,000 over 20 years (or 8.6% p.a.).

From the point of view of the now 85-year-old couple the decision to take the £50,000 early in exchange for  70% of their property has cost them a total of £211,000 (i.e. the profit made by the reversion company). In other words an equivalent interest rate of 7.5% p.a. That’s likely to be very much more expensive than a lifetime mortgage!

Is Home Reversion right for me?

Whether a home reversion plan is right for you or not will depend on your goals and your personal circumstances. You should always take professional advice before making your decision. It is likely that a lifetime mortgage will be a cheaper solution.

Advantages

  • You get the cash you need while still being able to live in your home
  • No monthly repayments
  • Cash is tax-free & used for any purpose
  • Lump-sum & drawdown options
  • You can sell only part of your property, leaving the rest in your will
  • You won’t benefit from house price rises on the portion of the home that you sell

Disadvantges

  • Your inheritance will be substantially reduced
  • You will be offered much less than the market value for your property
  • You will no longer be the sole owner of your home
  • Ending your plan early could prove very costly
  • Can be inflexible if your circumstances change
  • Could be poor value if you die within the first few years

If you are relatively young and healthy then it may not be cost-effective to release equity using home reversion. The deep discount on the market price of your property will deny you significant capital growth as shown in the example above. There are other options you can consider.

Alternatives to Home Reversion

As the example above shows, home reversion is likely to more costly than its more modern counterpart the lifetime mortgage. But there are also other ways to borrow against the equity in your property.

Discover some alternatives to home reversion plans and other types of equity loans.
 

Our Money & Credit Guides

If you’re uncertain which type of credit might suit you or you have a money problem then one of guides may help you. We summarise each type of loan and their pros and cons, and address issues regarding debt and credit ratings.

Home Reversion Plan FAQs

Home Reversion Plans: things to know before you apply

Please note: this information is for guidance only. You should clarify the terms of any equity release product with the provider before entering into an agreement.

How much can I borrow?

The amount you can borrow will depend on:

  • the value of your house
  • your age
  • the degree of discount to the market value the home provider considers they require.
What discount to the market price will I have to accept?

Reversion companies may only offer you 20% to 60% of the market value of your home (i.e. a discount of between 40% to 80%). The amount will depend on your age and your state of health.

What are the criteria for being accepted for home reversion?

To be considered for a home reversion plan you will need to meet the following basic criteria:

  • Aged 60+ (some providers may set the lower limit at 65)
  • A UK homeowner
  • Your house must be worth at least £80,000
Can I still move home if I have a home reversion plan?

Yes, the reversion company will consider your request especially if the new property is of a similar value and of an acceptable construction type.

Can I repay a home reversion plan?

Yes, but you may be required to buy back the portion of your home at the market rate i.e. for much more than you received for selling it in the first place.

Are there cheaper alternatives to home reversion?

Yes, almost certainly. The example above demonstrates the financial mechanics of a home reversion plan and why it is potentially so costly. You may find that some of these alternatives are more cost-effective and potentially less risky.

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Written/Reviewed by: Amanda Gillam