WHAT IS HOME REVERSION?
A Home Reversion Plan allows homeowners to release a lump sum from their property, without concerns over future house prices, or the effects of roll up interest.
How does it work?
With a Home Reversion Plan (also known as home income plans) you sell all or part of your property to the home reversion provider. In return you get a cash lump sum or income. As you are selling your property in exchange for the equity released, the plan provider takes the risk on future house prices.
Your home, or the part of it you sell, belongs to the reversion provider, but you are allowed to carry on living in it for the rest of your life. This means you sell the legal ownership of your home but will be guaranteed the right to live there for as long as you wish through a lifetime lease. In the case of joint applications, this applies to both parties, so that both your interests are fully protected.
Your age is a primary factor in determining the percentage released on the survey value of your home. Other factors, such as your gender and the estimated future value of your property, are also taken into consideration.
Remember that any secured loans or mortgages must be paid off on the sale of your house. It is also important to consider that as you no longer own your home, a Home Reversion Plan may be unsuitable for anyone wishing to leave the equity in their property as an inheritance for their next of kin.
Home Reversion may suit you if:
- You do not need anyone else to benefit from the full value of your home
- You want a lump sum or income now, and want to stay in your own home
Summary of key benefits:
- Tax free lump sum
- Guaranteed tenure – the right to remain for the rest of your lives
- Not at mercy of variable loan or mortgage interest rates
- Predictable costs
Summary of key disadvantages:
- Your eligibility for state benefits may be affected
- Your tax position could be adversely affected
- You will not be able to leave the equity in your property to dependents
Is it right for me?
A Home Reversion Plan can be a useful way of releasing equity from your home, especially if you do not want the stress of moving or downsizing, but you must be sure that it is right for you and suits your particular circumstances and needs.
Home Reversion may suit you if:
- With Home Reversion you no longer own your home (even if you only sell part of it).
- Depending on the particular plan, you may have to maintain the home while you live in it.
- You'll also be under a secure tenancy, so will have to follow all of the terms of the lease.
- If you choose a rent-back option, remember that you will have to make regular rent payments.
Questions to ask before going ahead:
- How will taking out a Home Reversion affect my tax position, eligibility for state benefits and inheritance when I die?
- What value cash sum or income will I receive?
- What conditions are there when I continue to live in the home?
- What would the rent payments be?
- What are the costs of the particular plan?
- Do I need professional advice?
NEW REGULATION – THE FINANCIAL SERVICES AUTHORITY (FSA)
Initially, Home Reversion suffered a lot of bad press, however companies and the products they offer have developed and improved considerably since the early days.
A big change that has helped make the market safer and more reliable (and helps you to spot the difference between a genuine provider or not!) is the new regulation that came into force from the Financial Services Authority (FSA) in April 2007.
The FSA rules were created to ensure that people taking out Home Reversion products enjoy much the same consumer protection as existing measures already taken for mortgages and other mortgage related products.
The key benefits of this for consumers are:
- Home Reversion firms offering these products must be fit and proper and appropriately resourced with competent staff;
- Consumers will get clear, concise and consistent information about a firm's services and products on offer (including appropriate risk warnings) so they can make informed choices;
- Where they have received advice, they should only be sold suitable products which take account of their circumstances and needs; and
- If things go wrong, consumers are able to obtain redress, if appropriate.
The new rules aim to make the whole process more transparent and create a market that is fair to customers, with particular emphasis on keeping all information and correspondence clear, easy to understand, and not misleading in any way.
FSA authorised firms offer you extra protection and the added peace of mind that the companies are legitimate, trustworthy and subject to the new conduct of business rules that govern their dealings with consumers. In addition the FSA are legally empowered to take action against any authorised firm that fails to comply with their rules.
What Exactly is “Sell and Rent Back?”
With sell-and-rent-back schemes, companies purchase homes at a price discounted below market value and subsequently rent them back to the original owners.
It is important to remember that this market is unregulated. This means that there are no controls in place to ensure that the valuation is independent, nor are there any requirements or controls in place to use independent solicitors, as would be the case in a regulated Home Reversion.
Most companies do not offer any residence guarantee beyond one or two years (some even as low as six months!) While this may suit some people’s individual circumstances, there is also the risk of exposing tenants to the possibility of eviction and no security of tenure.
The concept of sell-and-rent-back may seem attractive to those with serious financial difficulties but with no regulator to oversee such activities some landlords are likely to exploit customers' circumstances. Make sure you have all the facts about the plan being offered – see our essential checklist for key questions to ask.
Questions to ask before going ahead:
- Unfortunately there is still a lot of confusion about the difference between home reversion and sell and rent back, and there are still a number of companies out there offering sell and rent back schemes that can be easily confused with Home Reversion Plans.
- Remember that Home Reversion Plans are regulated by the FSA and must offer a secure lifetime lease. If the lease offered is for less than 20 years, then it is a sell and rent back scheme, and unregulated. If you are looking for a secure lifetime tenancy, be wary, as although the initial offer that you are made on a sell and rent back scheme may be attractive, you may find that you have no security as regards future rental increases or the right to remain in your home.
- Make sure you are aware of the facts and ask questions about the plan on offer – see our checklist for more information
- Remember that it is illegal for a firm to offer a Home Reversion Plan unless it is authorised by the Financial Services Authority to do so.
- Look out for authorised and regulated companies that are in turn under the watchful eye of the FSA - if in doubt you can telephone the FSA or use the FSA website to check on a company that you may be unsure about.
- To check whether a firm is authorised, visit the FSA Register.
- For more essential questions download our free checklist