Pros and Cons of home reversion plans for older people

If you’re over 65, own your home and need to fund your long-term care, you may be considering a home reversion plan.

Here’s how they work and some pros and cons to consider. You should always get independent financial advice before taking out a home reversion plan or any other kind of equity-release scheme.

What is a home reversion plan?

It’s a type of equity-release scheme that lets you use some of the money that’s tied up in your home. You could use this to pay for your long-term care, but only if you’re looking to stay in your home. With a home reversion scheme, you sell all or part of your property at less than its market value in return for a tax-free lump sum, a regular income, or both, but stay on in your home as a tenant, paying little or no rent. Home reversion plans are one of the two main types of equity release. The other is a lifetime mortgage. Using a lifetime mortgage to pay for your long-term care

How do home reversion plans work? With a home reversion plan you sell all or part of your home in return for a cash lump sum, a regular income or both. When your home is eventually sold, the reversion company gets their share of the proceeds of the sale. If you sold the entire property to them they will get all of the proceeds. If you sold part of your home, say a half, the reversion company gets that share of the proceeds, leaving the rest to go towards your inheritance.

How much will you get? You’ll usually only get between 20% and 60% of the market value of your house, depending on your age and state of health. This is because the reversion company is taking a risk on house prices and in not knowing when it will get its money back, as they cannot sell the property until you die or move into care. In the meantime, you get the right to carry on living in the home, paying little or no rent. The older you are when you start a home reversion scheme, the higher the percentage you’ll get of your home’s market value. For this reason they are normally best suited to those over 70.

Lump sum, income or both?

• A lump sum gives you the freedom to manage your money, but if you live to a very old age you might have little of it left for your later years.
• With the income option, there’s the peace of mind of knowing you’ll receive regular payments for the rest of your life, but if you die soon after taking up the plan and have only taken a few payments, you will have lost a large sum from your inheritance for very little in return (although some plans do protect against this).
• Many people find that a mixture of both offers the security and flexibility they need.

Key safeguards

The Financial Conduct Authority (FCA), the UK’s financial services regulator, regulates home reversion plans. This means that firms advising on or selling these products have to meet certain standards and provide clear complaints and compensation procedures.

What are the pros and cons of home reversion plans?

Pros

• You’ll receive money to pay for your care and living costs.
• You get to stay in your own home for the rest of your life, or until you have to move permanently into care.
• You won’t have to go through the process of moving home.
• The equity released on your main property is tax free.
• Equity-release schemes can help to reduce your Inheritance Tax liability.
• You can sell only part of your property, leaving the rest towards your inheritance.

Cons

• The inheritance you pass on to your beneficiaries will be substantially reduced and won’t include your home itself.
• You’ll receive considerably less than the full market value for your property.
• You’re no longer the sole owner of your home.
• If you end a plan early, you would need to buy back the share you sold at full market value which could be a lot more than you sold it for.
• A home reversion scheme could also be poor value if you die shortly after taking it out, though some schemes give families a rebate should you die within the first few years.
• They can be inflexible if your circumstances change – not all equity-release schemes are portable from one home to another and you’ll usually need the provider’s permission for someone else, such as a relative, carer or new partner, to move in.
• They might affect your entitlement to benefits, as any money you raise through equity release is likely to affect the assessment of your income and capital.
• You might need to pay arrangement, valuation and legal fees.
• You’ll be required to have buildings insurance.
• Lenders will expect you to keep your home in good condition, so you will need to set aside some money for repairs and maintenance.

You will still be responsible for paying your utility bills and Council Tax, so you’ll need to make sure you can afford these.

Home reversion plans versus other ways of funding care So how do home reversion plans compare to other means of funding your long-term care, such as downsizing, insurance policies and investment products? Typically, home reversion schemes don’t offer the best value for money, particularly since you never receive the full market value for your property. For this reason, equity-release schemes tend to be regarded as a last resort for homeowners. Downsizing is a more cost-effective option that can free up the money you need and allow you to maintain your financial independence. However, it can be both time-consuming and stressful to downsize, and you’ll have to move from your current home.

Please note: 

Home Reversion will only work in the Long Term Care arena, if that care is being taken at home or a spouse is still living at home; like all forms of Equity Release, the property has to be sold as soon as the property owner moves into long-term care.

April 2015 and the Care Act 2014 will make a difference, because the new Deferred Scheme, with the Local Authority lending the money, theoretically on a not-for-profit basis, will continue after someone has gone into care and will allow them to rent out the house at the same time.

Next steps – get independent advice If you do decide to go ahead with a home reversion plan, it’s essential to speak to an independent financial adviser, preferably one with the specialist CF8 qualification on advising on thefunding of long-term care. Get financial advice on how to fund your long-term care

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  This article is provided by the Money Advice Service.