Peter Turley highlights ten things advisers need to know about home reversions.
The first thing to note is a home reversion (HR) plan involves selling legal ownership and transferring some or all of the equity in a home to a provider in return for a discounted cash sum.
The amount received is discounted against the market value because the reversion provider might have to wait 30+ years before they can sell the property and receive its money.
2. A HR plan is not a loan or a mortgage and therefore the credit history of the customer is not a factor for the reversion investor who is buying all, or a percentage, of the property for a discounted value based on life expectancy.
As such, there are no monthly repayments to make, and it is usually possible to release a larger amount from a home than typically available with a lifetime mortgage.
3. Some providers offer a choice of having a lump sum and/or a drawdown version.
It is possible to utilise up to 100% of the property and the exact amount actually released from the portion utilised is dependent on age the older you are, the higher the percentage and property value.
The minimum qualifying age for a home reversion plan is typically higher than for a lifetime mortgage.
4. Whatever percentage is not utilised can be left to the beneficiaries. If the property increases in value, the estate will still benefit from the percentage of the property that has not been released.
5. HR customers are protected by FSA regulation, Safe Home Income Plan (SHIP) rules, and UK law.
This means they receive a lifetime lease until such time as they move out or sell the property.
6. HR plans can be portable and if one person on the original contract is still living in the property it cannot be sold until they die, or sell the property for other reasons or move into long-term care.
7. HR plan providers will only agree a deal on properties in good condition and that will be easy to sell.
As a ‘tenant’ in their own home people are still liable for general upkeep of the property.
If this is not done to a satisfactory standard the reversion company can carry out the work itself and invoice the ‘tenant’.
8. Taking out a HR scheme can affect means tested benefits or the amount of state support people are eligible to receive.
It may also have an impact on the amount of income tax they are liable for, as while the original monies are paid out tax-free if they are subsequently used to generate further income then tax might have to be paid.
Conversely, by selling the home, the value of it or whatever % of ownership is utilised is taken out of any subsequent calculations for IHT liability of the beneficiaries assuming of course, the cash released is actually spent.
9. HR plans have been regulated by the Financial Services Authority since April 2007, three and a half years after it began regulating lifetime mortgage schemes.
The delay was due to home reversions being categorised as a property sale, rather than a loan
10. At the moment HRs represent less than 5% of the overall equity release market.
But in current market conditions where there are concerns about the future prospects of house price inflation the market share of HRs could more than double.
Peter Turley is sales and marketing director at Newlife
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