What is a home reversion plan?

Explore the common pros and cons of home reversion plans

If you’re looking into different ways to raise cash from the equity in your home, a home reversion plan might be on your list of options to consider. But how does it compare to other plans such as a lifetime mortgage and how do you work out if it’s the right option for you?

A home reversion plan is where you sell all or part of your home in return for tax-free cash, without having to move out of your home. You stay living at home until you die or go into permanent long-term care.

If you’re aged 60 or over, this is a way to supplement your retirement income, or to afford one-off large expenses such as essential repairs to your home or to fund your future care needs.

How does a home reversion plan work?

A home reversion provider will offer you an amount of money as either a lump sum or a regular income in exchange for a percentage of or all of your home.

How much they offer will depend on the value of the property and on your age, and sometimes your health. If you’re older they’ll offer more, as they expect to see a return on their investment sooner.

You don’t need to make any repayments as it isn’t a loan, and the plan only ends when you (or the last borrower if you have a joint plan) die or go into permanent long-term care.

Because the provider is buying part or all of your home with the prospect of many years before they will see a return on their investment, they won’t pay you the market value of the part of your home they buy and will offer a lower amount.

How does this affect what I leave to my estate?

When the house is sold, the provider gets the value from the percentage of the home they originally bought from you, and the rest of the value (if any) is left to your estate.

Your family could potentially buy the property back, but this would cost more than the original sum the provider paid, as it would need to be bought back at current (at that time) market value.

The pros and cons of a home reversion plan

As with all forms of equity release, taking out a home reversion plan is a major financial decision, and should only be done after full consideration, including taking professional independent advice.

Some of the advantages of taking out a home reversion plan include:

If you don't sell 100% of the property you have an agreed percentage of your home that can be left to your estate
If you only sell part of your property, you will benefit from any increase in value on the percentage you keep
If house prices fall following taking out a plan, the fall in value won’t impact your estate for the part of the house you’ve already sold
You can usually take the plan with you if you decide to move house, as long as the house you move to is approved by the provider
You will be able to release more money if you are older, although with most plans you need to be at least 60 to qualify
Providers of home reversion plans are regulated by the Financial Conduct Authority.

Alongside the advantages, you should also consider some of the potential disadvantages of home reversion plans:

Taking the equity from your home in a lump sum could affect your eligibility for some means-tested state benefits
You typically can’t take out a home reversion plan until you are aged 60 or over
A provider won’t pay you the full market value for the part of your home that you sell
You may not be able to move house and take the plan with you if the house you want to move to is worth less than your current home
Buying back the share you sold if your circumstances change could be very costly, as you’ll pay the market value rather than how much you sold it for
If you choose to sell all rather than part of your home to a home reversion provider, the property will not form part of your estate when you die.

What’s the difference between a home reversion plan and a lifetime mortgage?

When you’re reviewing the options for equity release it’s important to understand the differences between home reversion plans and lifetime mortgages. Home reversion plans have been around longer than lifetime mortgages and have lost popularity as lifetime mortgage plans have gained in appeal. A lifetime mortgage is a loan secured against your home.

Some of the key differences are:

Home ownership: With a lifetime mortgage you keep ownership of your home, whereas with a home reversion plan you sell a part or all of your home to a provider
Paying back the money: With a lifetime mortgage you won't usually pay back the loan or interest until the agreement ends, which is when you die or go into permanent long-term care. With a home reversion plan you'll pay back a percentage of your home’s value when it’s sold
How much cash can you raise: A lifetime mortgage lets you borrow a percentage of the value of your home, and this is typically no more than 55% to 60% of its value. With a home reversion plan, you sell 25% to 100% of your home to a provider but for less than its market value.

Things to consider with home reversion plans

Whichever type of equity release you believe suits your needs, you will need to take financial advice before going ahead with what is a big decision for your future finances.

You should consider the alternatives to equity release, such as downsizing, reviewing benefit eligibility or looking for other sources of income such as renting out a room in your home
Talk to your family about your circumstances, as they may offer help or alternative ideas for your situation
Make sure that the adviser and product provider are members of the Equity Release Council.

Saga Equity Release, provided by HUB Financial Solutions Limited, don't offer home reversion plans but are available for help and guidance should you need it.