Home reversion plans

If you’re over the age of 65 and looking for a way to raise money then a home reversion plan might be a good option for you. This is where you sell your property in return for tax-free cash but can continue to live there.

What is a home reversion plan?

A home reversion plan is a type of equity release that allows you to access money that is tied up in your property. This type of loan is typically only available to people who are 65 or over and are looking for a way of funding their long-term care. If you are below this age then a lifetime mortgage might be more appropriate for you.

With a home reversion plan, you will sell all or a part of your property at less than its market value. In return, you will receive tax-free cash either in a lump-sum, as an income or as a combination of both. You then continue to live in your home as a tenant without paying rent, providing you keep the property well maintained and take out building insurance.

How much can you receive?

You will usually get between 20% and 60% of the market value for your house through a home reversion scheme. Lenders will usually not offer higher than this as they can’t guarantee when they will be able to sell the property and are unable to do so until you die or going into full-time care. In this case, they will be taking a risk in not knowing what the state of the property market will be in when they eventually sell your house.

The older you are when you take out the home reversion scheme, the more likely you are to get a higher percentage of the market value of your property. This is because lenders are more likely to get their money back backer sooner. Because of this, home reversion schemes are usually considered as most appropriate for people over the age of 70.

Home reversion considerations

Before applying for a home reversion plan you should weigh up the pros and cons:

Benefits of a home reversion plan:

  • You’ll receive tax-free money to help pay for your care and living costs.
  • You can live in your house rent-free for the rest of your life or until you have to move into full-time care.
  • You can choose to only sell a portion of your property and leave the rest in your inheritance.
  • Can avoid the process of moving home to release equity.

Some things that you should consider:

  • You will no longer be the sole owner of the home (unlike with a lifetime mortgage)
  • The amount you receive will be far less than if you sold your house normally.
  • If you choose to end the plan early you will need to buy back your share of the property at full market value.
  • These plans can be inflexible if your circumstances change.

Steps before taking out a home reversion plan

The process of releasing equity from your home is a big decision to make. You should discuss your finance options with your family and consider other loan or mortgage options before applying. Downsizing your current property might be more appropriate for you as it can be more cost-effective and won’t affect what you leave in inheritance.

Home reversion plans and other equity release schemes are regarded as high-risk and low value for customers. Because of this you should only consider these types of loans as a last resort.

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Why Clever Mortgages?

At Clever Mortgages we can offer you the support and advice required to ensure you get the right mortgage for your first home.  We provide access to a comprehensive range of mortgages from across the market. We are also authorised and regulated by the Financial Conduct Authority (FCA) and adhere to the Treating Customers Fairly (TCF) guidelines, so you can be confident that we will treat you with integrity and only recommend products that meet your needs.

Mortgage types

A fixed rate mortgage is where your interest rate stays the same for a set time period (usually between 2-10 years). As a result your repayments are exactly the same each month, regardless of what happens to other mortgage rates. These types of mortgages are popular with first time buyers and people looking to budget each month, especially those who have suffered from a poor credit history.

The main downside to a fixed rate mortgage is that if mortgage rates go down you can be paying a higher amount than you would on a variable rate mortgage. However, this can also go in your favour and if interest rates increase you can be paying less than you would on a variable rate.

Every lender will have their own standard variable rate (SVR), which is considered their basic mortgage. This interest rate goes up and down, usually in line with the Bank of England’s interest rates but the lender is free to raise this at any time.

This means that your monthly payments can go up or down depending on what the interest rate is at a given time. Some months you could be paying more whilst other months you could be paying much less.

A discount mortgage is when a reduction is applied to the lenders Standard Variable Rate (SVR) for a certain length of time (typically 2-3 years). Discount mortgages are attractive as they can allow you to pay slightly less than the bank's standard rate. However as the SVR can still fluctuate they are not ideal for people who are looking to stick to a strict long term budget.

A tracker mortgage is basically a type of variable rate mortgage.  What makes them different from other variable rate mortgages is that they follow – track – movements of another rate, the most common rate that is tracked is the Bank of England Base Rate.

A capped mortgage is the same as a variable rate mortgage; however the interest rate can never rise above a set “cap”. These mortgages can work well for people who can budget for different mortgage repayments each month but want the reassurance that their payments will never go above a certain amount.

Offset mortgages are linked to a savings account as well as your current account. Your savings will be 'offset' against the value of your mortgage, and you'll only pay interest on your mortgage balance minus your savings balance. These types of mortgages work well for higher earners or people who have a good amount in savings that they want to use towards paying their mortgage.

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