A home reversion plan has reduced in popularity over the years and is not as common as the lifetime equity release plan. The home reversion scheme allows a release of equity by the homeowner selling a portion of or an entire property in exchange for money. This money is normally paid by an equity provider as one large amount or it is paid in monthly instalments. Some providers allow you to collect a large amount in advance as well as small monthly instalments. Home reversion schemes do have their advantages.
The price that the equity release providers will pay for the property will normally be significantly less than the market value of the property. This might sound discouraging but there is a reason for it. The equity release provider needs to do this because the property owner will be allowed to stay in his or her property until he dies or decides to move into long term care. Only then will the equity release provider be able to sell the property. Additionally, they will live in a portion of their property that they no longer own - rent free.
While it might seem skewed towards the home reversion provider, keep in mind that you are leaving behind no debt under this type of release of equity. A mortgage or reverse mortgage leaves behind debt your beneficiaries have to pay off when you move to a care centre or die. You save money by not paying rent, a mortgage, or taking out other loans to pay your monthly expenses simply by tapping into equity you have in property you own.
The amount that the property owner receives is dependent on the value of the property and the percentage that the home owner is willing to sell. If the property owner does not decide to sell all of the property immediately, he or she retains the freedom to sell another portion of the property in the future, if there is a need to do so.
The advantages of home reversion plans are as follows:
• The payment that the property owner receives is tax free.
• The property owner is allowed to remain in his or her property although he or she has sold it or a portion of it.
• There is a guaranteed inheritance to pass to one’s heirs if less than 100% of the property is sold.
• Rent is free.
The disadvantages are as follows:
• The property owner will be selling his property for less than the market value.
• If, for any reason, the property owner wants to buy back the portions of his or her property that were sold he or she needs to buy it back at the current market value. This is a clear loss.
• You must be 65 years of age or older.
Age can be an advantage or disadvantage depending on your income situation. Someone who is retired, has an illness and no income, or a disability at an earlier age than 55 will be unable to take advantage of this type of release of equity. However, if a person can wait until 65 or even older there is a potential of gaining a better value for the portion of home sold. The scheme can work up to 80 with most providers, and some might allow for an age past 80.
If you need money for short term purposes and uses, you should not consider a home reversion plan. There are other forms of equity release schemes that can provide you with the money that you need for short term use without requiring you to sell your house.
One example is the lifetime mortgage release of equity. Like the home reversion, you have some benefits to this type of equity release. You are not subject to payments and instead gain a lump sum or instalment of payments based on the equity you take out of your home. The difference is in the debt on the home. Unless you are able to pay the mortgage back, your beneficiaries may have to sell the home after you die or move to a long term care centre.
Home reversion schemes are not to be confused with sell & rent back schemes, as home reversion plans are fully regulated by the FSA (Financial Services Authority, now the FCA) and the providers will also be members of SHIP (Safe Home Income Plans). Make certain you check providers’ qualifications before you sign for a release of equity scheme.
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