Unlike an equity release loan or mortgage (also known as a lifetime mortgage) where the debt isn’t repaid until you die or are taken into long term care, a home reversion plan is the actual sale of all, or part of, your property to the home reversion company, but you are allowed to live in the property until you die. Very simply the home reverts back to you after the sale – hence the name.
Home reversion: exactly how it functions
By selling a share of your home, you become a co-owner, yet reserve the right to reside in it for the remainder of your life.
The way home reversion works makes the cost tougher to determine compared to a lifetime mortgage. You surrender a portion of your home in exchange for an amount based upon its present worth, yet the best price is based on its cost at the end of the deal.
Just as lifetime home mortgage lenders differ in the value they are willing to give you depending on your age, home reversion lenders require a bigger share of equity from younger debtors and much less from those that are older.
You can usually surrender between 25 % and 100% of your residential property to the provider; however the amount you get in return will certainly be substantially less than the share you surrender. The older you are, the much more you'll obtain, but at age 65, for instance, a 20 % advance can result in you giving up 70 % of your residential property's value.
In February 2013, consumer champion Which? considered three home reversion service providers to view how much it would cost to get a home reversion advance.
For a 65-year-old couple with a home worth £250,000, one provider would provide £50,000 as a lump sum (20 % of the home's existing worth), for a 72.3 % share of the home. The £250,000 residence would be worth £336,714 after 20 years if residential property growth rates rise by 1.5 % each year. At this growth factor, the firm's share would be £243,578, leaving the couple with £93,135.
In the same situation, another home reversion provider would take a 73.8 % risk in the home (worth £248,495), leaving the couple £ 88,219, while another provider would only take 59 % (£198,661), however this would leave the borrowers with a much larger share in the property at £138,053.
In all of the calculations above Which? concluded that home reversion proves to be a far more costly option than a lifetime equity release mortgage. However If the rate of interest were to rise, or property costs to fall considerably over the long term, then the comparison would be a whole lot better.