What is a home reversion plan and should I use one in retirement?

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 explores home reversion in more detail.

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What is a home reversion plan?

Home reversion is the less common form of equity release that involves selling a portion of your property for either a cash lump sum, a fixed income for the rest of your life, or a combination of both.

Home reversion plans are typically available to those aged 60 or over. 

Crucially, it gives you the right to continue living at the property rent-free, either until you die or until you sell the property 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 you and your family.

How does a home reversion plan work?

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 (as their share is a percentage).

Home reversion plans are regulated by the Financial Conduct Authority (FCA) in the UK, which provides oversight to ensure that plans are fair and transparent.

Home reversion plan example:

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, they get £150,000, and the remaining £150,000 will form part of your estate.

How much money could I receive with a home reversion plan?

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. Offers can vary significantly based on the provider’s policies and the specific terms of the reversion plan.

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 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.

What are the benefits of a home reversion plan?

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).

It is also worth noting that many home reversion plans offer features such as a "no-negative equity" guarantee, ensuring you or your estate will never owe more than the property’s sale price.

Learn more: how to avoid inheritance tax in the UK

What are the risks of a home reversion plan?

There are significant costs and risks associated with home reversion schemes.

The most important thing to consider is 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, which means less 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 any benefit income you currently receive from the government.

To minimise this, you might choose to take a regular income instead. However, if you die sooner than you expected, you will end up receiving 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.

Finally, remember that different providers attach different terms and conditions to their plans, so it’s vital to do plenty of research before making any decisions.

Because you’re selling part of your home, some providers charge rent for you to carry on living there. You need to check the small print to see what you might end up paying.

A financial adviser or mortgage broker can help with this.

Who can get a home reversion plan?

Every equity release provider has its own lending criteria. Typically for this type of scheme you need to be over the age of 60.

If it’s a joint application, the age of the youngest applicant will be used.

Providers will usually 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.

Some providers might consider homes with outstanding mortgages, provided there is sufficient equity to cover the home reversion agreement.

Home reversion plan vs lifetime mortgage: how do they differ?

The other main type of equity release is called a lifetime mortgage, where 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 20% and 60% 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 you will pay interest on the loan, which will compound over time. So, 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 your family inherits 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. An adviser can help you with this choice.

How do I get the best deal on a home reversion plan?

Before making any decisions about equity release, seek guidance from a mortgage broker or financial adviser.

They will take you through all the benefits and downsides from your own perspective, along with possible alternatives and other potential sources of income, so you’re making an informed choice.

If you decide you want to release equity, they can advise you on the best kind for you and find the product on the market most suited to your needs.

Get expert financial advice

A home reversion plan can offer you a valuable way to access equity tied up in your property without the need to relocate, making it a potential solution for those seeking additional funds in retirement.

While it provides the benefit of remaining in your home and receiving tax-free money, it comes at the cost of not receiving the full market value of your property and may impact the inheritance left to your family.

Weighing these factors carefully and considering alternatives, such as lifetime mortgages, can help you make a well-informed decision.

Unbiased can quickly match you with a financial adviser for expert financial advice to ensure that you choose the most suitable option for your personal circumstances.

If you found this article helpful, you might also find our article on equity release for under 55's informative, too.