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Equity Review | October 18, 2017

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Home Reversion

Do you need cash for retirement? Do you want to avoid a mortgage to release equity? Do you mind if you are only a part owner in your home? Do you want to guarantee an inheritance for your beneficiaries? Do you want to have the guarantee that you have the right to carry on living in the property for the rest of your life?

If you answered yes to these questions home reversion plans may be the answer you are looking for. A mortgage does not have to be part of releasing equity during your retirement and this is where the home reversion plan differs. The home reversion plan is not a popular choice amongst equity release applicants these days, however they must always be explained by your equity release specialist.

What are Home Reversion Plans?
Home reversions are a partial sale of your main residence. You can elect to sell the entire house as well. The amount of home you sell to a reversion company is based on your comfort level, cash needs, and inheritance desires. The more home you sell to gain equity, the lower the inheritance is for your heirs. If you want your family to enjoy their life while you are still alive you may be willing to give their inheritance early by entering into a reversion scheme.

How the Process Works
Reversion companies have certain qualifications homeowners need to meet. The youngest homeowner must be 65 years of age at least. Your home will need at least £75,000 in property value and the minimum release is higher than a lifetime mortgage in that it needs to be at least £25,000. The more value in your property, the more you can receive from the home reversion equity release.

You do not have a mortgage under this scheme. You do not have interest. You receive a lump sum of tax free cash you can use as you wish. In return the investment company assesses your age, property value, and life expectancy. In other words, how long will you live in the home before they receive a return on their investment?

Even though you have sold your home, you still live in it as your main residence until death, until you sell all of it, or until you move to a long term care facility. When you move out or die, any portion of your home not sold while you were alive is considered remaining equity.

You receive a percentage for the portion of the home you sell. For example if you sell 50% of the home, you may receive 30% of that 50% value. Consider your home is worth £200,000 and you sell 50%. You know you have sold £100,000 of the property, but you may receive only 30% of that £100,000. The difference between 30% and 50% is the return on investment a home reversion company receives.

Of course, the reversion company does not see their investment right away. They have to wait, so the current value may appreciate or depreciate before you pass on. This is why the percentage received in a lump sum is lower than the true value.

Inheritance Protection for Heirs
One main advantage of reversion schemes is inheritance protection. Unlike lifetime mortgages, which are also equity release products, you do not need a clause to protect a portion of the home from the lending company. The amount of home unsold is always going to be yours, thus your heirs when you die.

The downside to this scheme is you can spend money requiring more later on. If you need to sell another portion and then another you may eventually tap out the equity in your home based on the ratio of equity available less the percentage kept by the reversion company. You may end up spending the inheritance. It does require control on your part to avoid selling it all if you truly want to leave an inheritance.

Tidbits to Remember
Under a lifetime tenancy agreement you live rent free in your home until you sell it and move out or die. If you have filed for a joint home reversion scheme, then the last homeowner named in the agreement will need to move out or expire before the home can be sold and the investment reclaimed by the reversion company. You have an assurance from the company that you will not be moved out of your home even if one spouse dies.

Your ages determine the percentage of home equity awarded. It is based on life expectancy, so a person 75 years old may receive a higher home equity value percentage than someone 65 years of age. The theory behind the calculation is the older individual will most likely sell the home or die earlier than a younger person. The best way to calculate how much a percentage sale of your property would reap then we would suggest the use of a home reversion calculator.

Additionally, the funds upon receipt are tax free. You can use them for retirement expenses, a special holiday, home improvements, the grandchildren’s education, or anything you wish to. Home reversion may be the better option if you feel uncomfortable with mortgages where an unknown amount or no inheritance could be left. This is where home reversion plans can have an advantage over lifetime mortgage by providing the homeowner with extra peace of mind.