Understanding home reversion equity release

Equity release products like home reversion plans and lifetime mortgages allow people over the age of 55 in the UK to release tax-free cash from their property while still living in their home. Typically, the equity in your home is tied up until your property is sold, however, equity release gives you the opportunity to release some cash without giving up your home.

What is a home reversion plan?

A home reversion plan is a type of equity release product where you sell a portion of your property (or all of your property) to a home reversion provider in exchange for cash.

Home reversion plans are less common than lifetime mortgages. When it comes to equity-release products, lifetime mortgages are the most popular choice. Unlike home reversion plans, you do not sell a portion of your property to the lender. Instead, you take out a secured loan against your home which is similar to a mortgage. You are offered an interest rate which then compounds during your lifetime unless you choose to pay it off. When you die or go into care, the loan is repaid from the proceeds of the sale of the property.

If you prefer to sell a portion of your home rather than take out a secured loan, you'll want to explore home reversion plans instead.

How does a home reversion plan work?

A home reversion plan works by selling a part of your property (typically significantly below its true market value) in exchange for tax-free cash. You are, however, allowed to remain in the property for the rest of your life. In some cases, there will be conditions attached to you living at the property; for instance, you will usually be responsible for maintaining it and ensuring it's in a good state of repair.

Your provider then gets paid when you die or move into care and they sell your home. They get paid an amount proportionate to the part of the house they bought, while your beneficiaries get to keep the remainder of the proceeds.

If you are interested in taking out a home reversion plan, you will need to:

• Research home reversion providers - Home reversion plans are less popular than lifetime mortgages so you will need to spend time researching providers and sourcing potential quotes that work well with your particular circumstances.
• Speak to a qualified equity release advisor - This step is a Financial Conduct Authority requirement; you need to speak to a financial advisor about your choices and this often comes with a fee.
• Budget for the fees involved in the process - Fees include independent valuation fees, arrangement fees for the product and legal fees for the solicitor.

You'll also need to think about what it is you want from a home reversion plan. Some things to think about include:

• Whether you want a lump sum or regular monthly payments; different providers will offer different plans
• Whether you're happy to pay rent if it means unlocking more money at the outset; some providers will offer this
• Whether you want the flexibility to be able to move homes down the line; some providers offer the option to move your home reversion plan to a new home

As you can see, there's lots to think about with a home reversion plan. If you think it might be the right option for you, we'd recommend booking a free, no-obligation consultation with an independent financial advisor where you can ask all your questions.

How much money can you receive with home reversion equity release?

When you opt for a home reversion plan, you will not be offered the true value of your property. Instead, you will typically be offered between 20% to 60% of the value of the property, or an amount proportionate to the portion you're selling.

The exact amount you can receive from a home reversion equity release plan depends on various factors including your age and property valuation. Typically, the older you are, the more you will get via a home reversion plan. This is true of equity release products on the whole.

If you are taking out a home reversion plan with your spouse, their age will be taken into account too as you will both be allowed to live in the property until you die or go into care as part of the arrangement.

Benefits of home reversion plans

A key benefit of home reversion plans is the financial stability they can offer in older age. As with other equity release plans, it can be an effective way to boost your pension pot without having to worry about repaying a loan or downsizing. The cash you receive is tax-free too, which is an added benefit.

Unlike lifetime mortgages, home reversion plans do not charge interest on the cash lump sum you receive. For people worried about compound interest adding up, a home reversion plan could be a good compromise as a portion of your home is sold off, but you don't have to worry about interest rising faster than the value of your home.

You also only need to sell a portion of your home to release cash. So, for example, if you sell 25% of your home, your family can still sell on and benefit from the remaining 75% share when the time comes. This means you can still leave an inheritance behind.

Risks of home reversion plans

Home reversion plans can have their drawbacks. The most obvious one is the fact that you will not be paid the true value of your home when you opt for this plan. Instead, you will receive between 20% to 60% of the value of your home or the portion you're willing to sell. This means that you're effectively "giving up" up to 80% of the equity in the part of your home that you are selling, for the privilege of being able to live in the home you already paid off.

Another major downside of home reversion plans is that you're selling your home (or a part of it) in exchange for what's essentially a free lifetime tenancy and a little bit of cash. When you die, the home reversion provider will take your home and sell it, benefitting from the years of appreciation that have built up while you've lived there and maintained it. Your family will not be able to benefit from this appreciation in price, particularly if you've sold off your entire home to the home reversion provider.

In addition to this, the cash lump sum may mean you lose your entitlement to certain means-tested benefits such as council tax discounts or pension credit. You will still receive your state pension as it is not means-tested.

These downsides are worth considering before going down this route as undoing a home reversion plan is exceptionally difficult and costly. Equity release is designed to be a lifetime commitment.

Comparing home reversion plans to lifetime mortgages

The table below sums up the key similarities and differences between home reversion plans and lifetime mortgages to help you decide which one is right for you.

Home reversion plan	Lifetime mortgage
You sell a portion (or all) of your home to the provider.	You take out a secured loan against your property.
You get 20% to 60% of the true value of your property proportionate to the part you've sold.	You can take out between 20% to 60% of the true value of your property in equity.
No interest on the cash is payable as it's not a loan, but you may have to pay "rent" to the provider in some circumstances.	Interest compounds for as long as you live in the property which can add up substantially.
The money you receive will be tax-free but you will reduce the size of your estate and no longer fully own your property.	The money you receive will be tax-free but you will reduce the size of your estate.
You typically need to be at least 60 years old (and often older) to take out a home reversion plan.	You typically need to be at least 55 years old to take out a lifetime mortgage.

Evaluating your eligibility for home reversion plans

Eligibility for home reversion plans is a little different to other types of equity release products. Typically, home reversion plans have higher age criteria than lifetime mortgages. While many lifetime mortgages require that you're at least 55 to apply, with home reversion plans, you often need to be at least 60 to apply. As with the vast majority of equity release plans, your property will also need to be worth a minimum amount. This is around £70,000 currently. You also typically need to be willing to "sell off" at least 25% of your home but can sell up to 100%. This will effectively mean you no longer own your home in full. However, you will still be responsible for maintaining it while you're living in it.

Frequently asked questions

Below, we take a look at some of the key frequently asked questions when it comes to releasing equity.

Is home reversion the same as equity release?

Home reversion plans are a type of equity release product. All home reversion plans are equity release products but not all equity release products are home reversion plans. Another popular equity release product is a lifetime mortgage.

What are the pitfalls of home reversion?

Taking out a home reversion plan means you will no longer own your property and you will reduce your estate meaning you'll leave behind a smaller inheritance. Those are the two key pitfalls to be aware of.

A home reversion plan means you're selling part of (or in some cases, all of) your property to the provider and will therefore no longer own it. You will not be able to benefit from its appreciation in value fully and you will need to be able to leave behind your home to your loved ones when you die.

As with all equity release products, taking out a home reversion plan means you will reduce the overall value of your estate. Whether you only sell a portion of your home or the whole property, you will not be able to leave behind as much as you normally would.

What percentage do you get for home reversion?

A home reversion plan will typically offer you between 20% to 60% of the true value of your property proportionate to the part you sell. So, if your property is worth £300,000 (which is slightly above the current average) and you decide to sell 25% to the home reversion provider, that 25% will be worth £75,000 in real terms. But because under a home reversion plan, you will typically only receive 20% to 60% of the true value, you will likely walk away with a sum between £15,000 and £45,000. This is a tax-free sum but does not account for the costs involved which will also eat away at your final sum.

Can you buy back a home reversion plan?

Buying back a home you've sold via a home reversion plan is a costly and lengthy process that involves seeking financial advice, valuing your property again, and covering solicitors' fees to undertake the process. If your home has gone up in value since you sold it, you might find that you'll need to pay the home reversion provider more than what you sold the property for. As such, while it is possible to buy back a property sold under home reversion, it's usually best not to go down the equity release route in the first place if you think you'll want to keep hold of your property.