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Home Reversion Plans

A home reversion plan is a specific type of equity release loan and one that has both unique advantages and disadvantages when compared to other mortgage loans on the market. As with any other mortgage loan, a home reversion plan is an effective way to release equity on your home, yet it’s terms are a bit more rigid and confining than some others. You will be able to convert a portion of the value of your home into cash, but you may not retain as much of the value of your home as you would with some other types of equity release.

What Is a Home Reversion Plan?

When taking out a home reversion plan, a homeowner effectively sells a designated fraction of their home to a lender. In exchange, the homeowner gets to both continue living at the property, essentially for free, and also receive either a lump sum or some amount of supplemental income. In some cases, they may also receive a mix of the two.

As with any equity release loan, the money you stand to receive from a home reversion plan is determined by both the value of your home and your life expectancy. The maximum amount a person will typically receive is 60% of their home’s value. In such a case, the homeowner forfeits 40% of the value of their home for 40% of the current market value of your home in cash.

How Home Reversion Plans Work

Homeowners who choose to take out a home reversion plan will be entitled to receive a portion of the value of their home, generally anywhere from 20-60%. As established, the percentage of value received will entitle the lender to an equal percentage of the value of their property.

The amount of money you receive from a home reversion plan will be determined by the current market value of your home. Since property values are essentially always going up, you are losing out on any increase in value your property may see in the future, in exact proportion to the portion of its value you are selling.

Although no interest payments are involved in home reversion plans, this fact could entail a significant loss of money in its own right that should be taken into consideration. Other types of equity release that are more flexible in how much stake the owner retains over the property may be considered for homeowners who think they might wish to hold onto their homes or pass them on as an inheritance to their family.

Your Property Will Need to Be Evaluated

In order for the lender to determine the value of your property, you will need to have your property inspected. Of course, the amount you stand to receive from taking out a home reversion plan will increase alongside the value of your property.

As well, as with other popular forms of equity release, you may receive a good deal more in funds the shorter you plan on remaining in the home, whether that be as a result of death or simply because of plans to move into a long-term care facility further down the road. Once you agree to the terms of the home reversion plan, you may either receive the money all at once or in installations.

You Sell Your Property and Retain a Portion of Its Value

In exchange for sacrificing the established value of your property at whatever percentage, you will be allowed to live in your current home for the remainder of your life, or until you otherwise decide to move out, such as into a long-term care facility or other retirement community. Essentially, you are cashing out on a portion of the value of your home and then splitting the value of it with the lender in exchange for being able to continue living there for the incremental future.

Who Home Reversion Plans Are For

Due to the limited amount of property value that is retained, home reversion plans are for those citizens especially getting on in their years who are looking to downsize and tie up their financial affairs permanently. They are not for those who wish to pass on their home to their family, as the home is essentially no longer theirs.

Instead, the home exists in a grey zone, waiting to be sold to the highest bidder as soon as the current homeowner moves out. Because of this, while most forms of equity release are typically targeted at those over the age of 55, those who opt for home reversion plans are often already well into their retirement.

It’s certainly the best option for those who don’t care about the future of their home and would simply wish to put it all behind them once they’re ready to leave.

1. The Homeowner Will No Longer Own the Home

Of course, the biggest downside to the home reversion plan is that the homeowner no longer will ever be able to have ownership of their home, essentially cashing out on both a significant stake in its future value and any possibility of retaining it in full.

While this does leave less to worry about for the homeowner, and means they won’t have to even consider making payments and calculating interest rates further down the road, it also means that they don’t stand to benefit whatsoever from any increase in value the property might be privy to in the future. All they can do is cherish the home in the limited time they have left with it, which may seem like more than enough for certain elderly homeowners.

2. Home Inversion Plans Are Permanent

If you wish to retain a little bit more control over any possible inheritance you stand to leave behind for loved ones, you may opt for one of the many alternative means of releasing equity from your home. There are numerous other types of mortgage loans, such as lifetime mortgages, that will allow you to withdraw cash funds from the value of your home while still allowing you to theoretically retain it as an asset in the future through repayments of your debt.

With home reversion plans, however, there is no such possibility. Still, they will continue to pose a viable option for the right homeowner, especially those who aren’t concerned with leaving their home behind as an inheritance.

3. Will There Be Any Inheritance Left?

With home reversion plans, the homeowner retains whatever value of the home they did not sell. If they received 50% of the value of their home, they retain 50% of the rights to the profits from the home being sold.

That means that when it comes time for the property to be sold, half of those profits will go to the homeowner and/or their family/inheritor, and half of them will go to the lender, with whatever rise in value the property has seen over the time of the mortgage plan serving as their profit.

So while home reversion plans certainly offer the homeowner a more limited amount of control over their home as an asset to be left behind as an inheritance, that doesn’t mean that the retained value of the home won’t stand to benefit you or your loved ones in the form of a cash inheritance.

Are Their Costs Involved In Home Reversion Plans?

Clearly, a huge draw of the home reversion plan is that it requires little to no cost from the homeowner in order for them to effectively cash out on a significant portion of the value of their home. However, there are still some minor costs involved that need to be taken into consideration before establishing whether or not a home reversion plan is a viable option for you.

1. Some Small Costs May Be Involved In Taking Out a Home Reversion Plan

Costs that a home reversion plan might entail include fees for its arrangement, as well as possible fees for the evaluation of your property. On top of this, those who are entering into any type of serious financial agreement are advised to seek out the aid of a solicitor in ensuring that all liabilities of the loan are properly covered, with all parties fully educated about the transaction that is to occur. While the solicitor may require a fee for their service, this fee is nominal in relation to the loss you stand to suffer when entering into an agreement without a full understanding of its consequences.

2. Your Property May Need Some Renovations

Lastly, those looking to take out a home reversion plan should also note that there may be some work that needs to be done on their property in order to make it viable for the lender. Unlike other equity release plans, home reversion plans give essential ownership of the property to the lender, meaning it’s no longer yours.

That means that you no longer have complete and total control of your property. You will be required to keep your property up to snuff and ensure it is a consistent condition for the lender. If there are any current issues with the property, these will likely need to be resolved before the home reversion plan goes through, which homeowners will need to keep in mind.

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