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What is Home Reversion and how does it work?

A home reversion plan is a way to release equity from your property by selling all or part of your home to a home reversion provider in exchange for a tax-free lump sum or regular income payments. Unlike a lifetime mortgage, with a home reversion plan, you sell a portion or all of your property, but you retain the right to live in it rent-free for the rest of your life.

This arrangement allows you to access capital from your property without needing to move, while the home reversion provider becomes the legal owner of the share of your property you’ve sold.

How do they work?

A home reversion plan has several key features:

Eligibility and equity released

To qualify, you generally need to be aged 60 or over and own a home in the UK. The amount of money you receive for the share of your home you sell is typically less than the market value of that share. This discount reflects the provider allowing you to live in the property rent-free for life.

The amount you can receive is influenced by your age (older applicants typically receive more), your property’s value, and your health and lifestyle, as well as the specific provider’s criteria.

Selling a share of your home

With a home reversion plan, you sell a percentage of your property, ranging from 25% to 100%, to the provider. In return, you receive a tax-free lump sum or a regular income.

Even if you sell 100% of your property, you still retain the right to live there rent-free until you pass away or move into permanent long-term care.

No rent or monthly payments

A defining feature of home reversion plans is that you are not required to pay any rent or make any monthly repayments. Once the agreement is in place, you simply continue to live in your home.

Retained ownership (partial) and No Negative Equity guarantee

If you sell a partial share of your property, you retain ownership of the remaining percentage. You are responsible for maintaining the property, paying buildings insurance, and covering council tax, just as you would if you owned 100% of the property.

While the “No Negative Equity Guarantee” primarily applies to lifetime mortgages, the nature of a home reversion means you are selling a specific share of your property.

Therefore, you won’t owe more than the value of the share you sold because you’ve already received the payment for it. The provider only ever recovers the value of the share they purchased.

When the plan ends

The plan comes to an end when the last homeowner dies or moves permanently into long-term care. At this point, the property is sold. The home reversion provider receives their percentage share of the sale proceeds, corresponding to the share they purchased from you. Any remaining percentage of the sale proceeds goes to your estate if you retained any share of the property.

Enhanced home reversion plans

Similar to lifetime mortgages, some home reversion providers offer enhanced terms. This means you might receive a larger lump sum or a higher percentage of your property’s value if your health or lifestyle indicates a shorter life expectancy.

How they work:

When you apply, you’ll complete a health and lifestyle questionnaire. This may ask about factors such as:

• Smoking habits
• Body Mass Index (BMI)
• Presence of medical conditions (e.g., diabetes, high blood pressure, heart conditions, cancer, Parkinson’s disease, multiple sclerosis)
• Whether you’ve retired early due to ill health
• Medications you are currently taking

Providers use this information to assess if your life expectancy might be shorter than average for your age. If so, they might offer more favourable terms because they anticipate recovering their investment sooner. This can be a significant benefit for individuals with certain health conditions, allowing them to access more capital than with a standard plan.

The Equity Release Council

While primarily focused on lifetime mortgages, the Equity Release Council (ERC) also sets standards that apply to home reversion plans offered by its members, ensuring consumer protection and promoting high standards within the equity release sector.

These standards include:

• You retain the right to live in your property until the last surviving homeowner moves into long-term care or passes away.
• You have the right to move home and transfer your plan to another property, providing your new home meets your provider’s criteria. If you have sold a percentage of your property, this percentage will transfer to your new home.
• Transparency regarding the valuation of the property and the percentage share being purchased.

Their Consumer Charter also outlines what customers can expect from Council members, emphasising:

• Trust. Dealing with regulated and qualified professionals who work in your best interests.
• Tailored advice. Clear, transparent, and personalised recommendations based on your individual circumstances, including exploring alternatives.
• Thorough support. Comprehensive answers and guidance through the entire process, including the impact on your family and future plans.
• Transparency. Clarity at every stage regarding advice, product details, terms and conditions, product standards, fees, charges, and potential financial impact.

These standards and the Consumer Charter are designed to help people confidently explore all their options and ensure they are treated fairly throughout the life of their equity release plan.

Important considerations

Taking out a home reversion plan is a significant financial decision with long-term implications.

Understanding the following points is very important:

Reduced inheritance. A home reversion plan will reduce the amount of equity remaining in your home, and potentially the entire property, which in turn reduces the value of any inheritance you can leave to your beneficiaries. It’s often advisable to discuss this with your family members so they understand the decision.

Effect on means-tested benefits. Receiving a lump sum or regular payments from a home reversion plan could affect your eligibility for certain state benefits that are based on your income or savings, such as Pension Credit or Council Tax Reduction. It’s crucial to check how this might impact any current or future entitlements.

Valuation discount. The amount you receive for the share of your home will be less than its market value. This is because the provider is taking on the risk of future property value changes and allowing you to live in the property rent-free for life.

Property maintenance. You remain responsible for maintaining your property. You’ll need to ensure you have the financial ability to keep your home in good repair, as providers may require this.

Moving home. Most home reversion plans are portable, meaning you can transfer them to a new property. However, this is subject to the new property meeting the provider’s criteria. If the new property isn’t suitable, the plan may have to end.

Professional advice is essential. It is a regulatory requirement to seek independent financial advice from a qualified equity release adviser before taking out a home reversion plan. They will help you understand all the options, risks, and costs, and confirm if it’s the right solution for your personal circumstances. You will also need independent legal advice.