Updated 25 June 2020
If you need an additional source of income in later life, you might wonder if you can access some of the value tied up in your home. This is called equity release, and it has become popular due to the speed at which house prices have increased in recent decades. Older people who don’t necessarily want to downsize to a smaller property can access some of their home’s value without selling up.
There are two main ways to release equity from a property: a lifetime mortgage and home reversion. This article looks at the second of these options in more detail.
Home reversion is the less-common form of equity release. Available only to people over a certain age, it involves selling a portion of your property in return for either a cash lump sum, a fixed income for the rest of your life, or a combination of both. Crucially, it gives you the right to continue living at the property rent free, either until you die or until you sell the property (e.g. to move into long-term residential care).
If your home has significantly increased in value since you bought it, and your current retirement income may not be enough to meet your needs now or in the future, then some form of equity release may be appropriate for you. However, this does carry risks and drawbacks for either you or your family, as explained below.
Home reversion providers will make an offer to purchase a percentage of the property. Bear in mind that the price they offer will be substantially below market value – you’re paying a lot for the convenience of not having to move.
Before the process begins, you’ll need to consider how much money you’d like to raise, and consider that sum against the percentage of your home that you’re willing to sell. You might decide that having the extra money now is worth the expense of losing out on the home’s full value at a later date.
After accepting an offer, you’ll receive either a tax-free lump sum in cash, regular income payments or a mix of the two (the choice should be up to you).
From this point onwards the entire property will be leased to you, rent free, for life, or until you decide to sell your remaining share and move out. When the property is eventually sold, the home reversion provider will receive their previously agreed share of the final sale price, and the rest will be yours or form part of your estate. Note that if the property’s value rises after you’ve set up the plan, the provider will get more money (because their share is a percentage).
Your home is worth £200,000 and a home reversion provider offers you a £50,000 lump sum for 50% ownership. You accept the offer and over the years, the property’s value increases. After your death, the property is sold for £300,000.
The provider will therefore receive 50% of the sale price. So in this example they get £150,000 and the remaining £150,000 will form part of your estate.
For the share of the property that you sell to the provider, you can expect to be offered between 30% and 60% of its true market value at the time of signing. How much money a provider is willing to pay depends on a number of factors.
Your age is a key consideration. Generally, the younger you are, the less money you can expect to receive. This is because the provider will typically have to wait longer before they’re able to sell the property. Likewise, if you are in generally good health you’ll receive an offer that’s lower than if you had an existing health condition. For this reason, it’s actively in your interests to communicate clearly any health conditions you may have, even if you don’t think they’re relevant.
The current market value of the property, will also affect the amount you’re offered, as will the location of the property and the future desirability of the area. The final factor of course is how much of a share in the property you are willing to sell.
The biggest benefit of home reversion is simply being able to release money from your property without moving to a new house. That means you can stay in a familiar area and home, while benefiting from some of the value locked away in your home. This can help you meet additional costs in later life, such as care costs. You’ll also avoid the stress of moving.
Any money you receive will be tax free (since technically it’s already yours), unlike pension income. Selling part of your home can also help to reduce inheritance tax (IHT), if your home is expensive enough to fall under IHT. However, be sure to weigh these savings against the risks and costs of home reversion (see below).
If you want to see how home reversion compares to a lifetime mortgage (another form of releasing equity) then this is covered later in this article.
There are significant costs and risks associated with home reversion schemes. The most important to consider plan is that you won’t receive the full market value of your property. So in exchange for having more money now, you are agreeing to have less money later (e.g. to leave to your family).
There can also be drawbacks linked to the way you choose to receive your money. If you choose a lump sum, it could affect the level of financial support you currently receive from the government. To avoid this you might instead choose to take a regular income. However, if you die sooner than you expected, you would end up receiving very poor value for money. Some plans do offer a degree of protection against losses resulting from premature death.
Sometimes choosing a mixture of both options (income and lump sum) can help address these issues.
Finally, remember that different providers attached different terms and conditions to their plans, so it’s vital to do plenty of research before making any decisions. Fortunately, an independent financial adviser or mortgage broker can do this for you.
Every equity release provider has its own lending criteria. Typically for this type of scheme you need to be over the age of 65. If it’s a joint application, the age of the youngest applicant will be used.
Providers will also require you to own your own home in full, with no mortgage. They will also stipulate that the property must be worth above a certain amount. How much exactly depends on the provider, but you’ll usually be looking at a minimum of around £70,000.
The other main type of equity release is called a lifetime mortgage. With a lifetime mortgage, You borrow a lump sum which is eventually repaid from the sale of your home, either when you die or move into long-term care. The maximum amount you can borrow is usually between 18 per cent and 50 per cent of the property’s total value.
With a lifetime mortgage you retain full ownership, and so benefit from all increases in the property’s value if prices rise. With a home reversion scheme, you’d only benefit from price increases on the share of the home that you still own.
A lifetime mortgage is also available from an earlier age – typically 55. The maximum amount you can borrow will usually be lower the younger you are.
The main downside to a lifetime mortgage is that you will pay interest on the loan, which will compound over time. Therefore, if you don’t pay off the interest as you go, you may end up owing far more than you borrowed. However, most providers offer a ‘no-negative equity’ guarantee, which means you can’t end up owing more than the final sale price of your home. You could, however, end up owing the full value of your home, so that your family inherit nothing.
Whether a lifetime mortgage or a home reversion scheme is best for you will depend on a wide range of circumstances, such as how much you hope to leave your family as an inheritance. Your adviser can help you with this choice.
Before making any decisions about equity release, be sure to seek guidance from an independent mortgage adviser. They will take you through all the benefits and downsides from your own perspective, along with your possible alternatives and other potential sources of income, so that you know you’re making an informed choice. If you decide you do want to release equity, they can advise you on the best kind for you, and find the product on the market that is most suited to your needs.
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