Despite the fact that home reversion plans have been regulated by the Financial Conduct Authority since 2007 (formerly the FSA), the number of new business cases written only now stands at 3% of all equity release sales. This percentage is dwindling and counter responsive given the fact that home reversion schemes have some protective advantages.
Home reversion schemes have a higher starting age, 65, than lifetime mortgages. Lifetime mortgage schemes will consider many factors like the age of a person, sex and the value of the property to determine the amount that can be released. Lifetime mortgages present many options e.g. inheritance protection and drawdown facilities than home reversion plans do.
Additionally, lifetime mortgages have the advantage of being available from the age of 55 and can also now take account of the health of the individual. This is something that home reversion plans have failed to offer since Partnership offered their enhanced home reversion scheme. However, they do benefit from the guarantee offered in that a proportion of the property will always pass to dependents and other beneficiaries.
Reversion schemes work on the premise that you sell part or all of your property. If you sell 50% of your home, then 50% remains with your beneficiaries once you pass away. At this point the provider will sell the home to gain their funds paid out to you when you were alive. Your beneficiaries receive a fair portion of the value based on the amount of property left under their ownership.
Home reversion plans do not accumulate interest, so you do not have to worry about an uncontrolled increase in debt which can apply to lifetime mortgages. There is the other advantage of the fact that you will benefit from the increase in value on your share of the property. People who are much older could even release more cash with a home reversion plan, so it helps a lot in the raising of money compared to a lifetime mortgage.
The disadvantages of a home reversion plan are few, including the fact that you will not own your home 100%. This is perhaps the main reason that has contributed to the dwindling number of home reversion plans. If you choose to sell your home, your estate will not benefit and neither will you retain any property price escalation on the proportion of the property sold.
It is not easy for a reversion company to release money on a property so they tend to be very selective. Lastly, people who die immediately after taking out a home reversion plan could lose a lot more on their estate, unless some protection options are built into the scheme.
The FCA has helped in recent years to provide better protection under home reversion plans in that someone who dies within 4 to 5 years after starting one of these plans may not have to worry about loss of value in their estate. While the property is often sold, the beneficiary can retain a higher portion of the value than they might otherwise gain.
There is also the protection of the lifetime tenancy agreement that states anyone named in the plan and in the tenancy can remain in the tenancy for their lifetime. Even if one person on the agreement passes away early, the remaining family member is able to live out their life in the home before the provider can sell the property.
A main advantage to remember regarding home reversion plans is the lack of increased debt. In fact, you can use the money you obtain on the partial sale of the home to pay off other debts you still have such as personal loans, car loans, or credit card debt. You also do not take out a new loan to gain money for expenses unlike lifetime mortgages.
Lifetime mortgages might be seen as more flexible because of the payment options and age; however, you have to be concerned over the debt you leave behind. In trying to save one’s inheritance you might actually put it into jeopardy under this scheme; that is, if the remaining person has to sell the home to pay the lifetime mortgage.
Before equity release in any form including home reversion plans is undertaken, it is important to get financial advice from a qualified equity release adviser who provides free initial advice via telephone, or even meet you at your own home. You will be presented with many equity release solutions from the range of home reversion plans and lifetime mortgage schemes offering their products in the market.
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