How a home reversion scheme can get you an instant lump sum

A home reversion scheme means you get to stay in your home and simultaneously access some of the equity you hold in it… Too good to be true? Nicole Pedersen-McKinnon runs through the pros and cons.

By Nicole Pedersen-McKinnon

Are tough times starting to bite, yet your home value is hitting the heights?

What if you could get at the equity tied up in your property, without having to sell or move out?

Well, selling a chunk of your property is one of the options to extract cash from your property… and escape the cost-of-living crisis.

A product known as a home reversion scheme lets you do it. And it’s one that sits alongside and is an alternative to a reverse mortgage or the home equity access scheme.

More on this: how reverse mortgages and the home equity access scheme compare Here’s how a home reversion scheme works.

What is a home reversion scheme?

When you sign up to a home reversion scheme, you straight-up sell a portion of your home to a financial institution.

This is very similar to a commercial reverse mortgage or the government’s home equity access scheme.

The same, too, is that your debt can be repaid from the sale of your house either when you sell, or from your estate after you die.

Another feature in common between a home reversion scheme and a reverse mortgage or home equity access, is that as soon as you sign the contract, you get money. With a reversion scheme, this is usually as a lump sum, although a regular income may also be possible.

The amount you owe doesn’t increase

However, here’s where the products diverge: a home reversion scheme is not a loan, like the alternatives; it is actually a part-sale of your property.

So, as opposed to interest on a loan rolling up because it is not getting paid periodically, potentially consuming a higher and higher amount of your property’s worth, the amount owed to ‘somebody else’ will stay set.

In other words, if you sell 20 percent of your property, you will always owe 20 percent of your property’s worth. As such, when it is sold, 20 percent will go to the home reversion provider.

But note it’s not quite that easy: there is always an extra cost…

Some products will pay you less initially than the prevailing market value for that proportion of your property. Under this model, it’s just part of the price of the opportunity.

Under a second model, a provider’s share of your property may increase over time, a little like a reverse mortgage or the government equity access scheme.

Again, that’s just for their ‘trouble’.

Check though, whether a home reversion provider offers a “rebate” feature. This would be triggered if you sell your home and your debt is repaid earlier than might have been expected.

How ‘early’ will be part of your contract and the rebate will also depend on how much you sold the property for (or how much the property was sold for by your estate).

Check carefully, too, the explicit fees involved.

What are the pros of a home reversion scheme?

With the proviso of the previously explained reasons why you may not owe exactly what you initially sell, your debt is much more set with a home reversion scheme.

With a reverse mortgage, in particular, high interest rates and the fact that there are no periodic repayments mean a potentially growing liability.

You may need significant property price growth to maintain a decent amount of equity for yourself or for your heirs. Note that laws introduced more than a decade ago mean that your debt with a reverse mortgage cannot grow to more than your property is worth - it’s called the no-negative-equity guarantee.

A home reversion scheme, fundamentally, is a bit more straightforward.

You sell a chunk, for which you get a chunk of cash.

What are the cons of a home reversion scheme?

To repeat the above, you sell a chunk of your home. With a reverse mortgage or home equity access scheme, you don’t. All ownership stays with you.

This may be academic in reality though… there is still a debt that needs to be repaid from the sale of your property.

But home reversion schemes also do not fall under the national consumer credit protection legislation. This is specifically because they are not loans but part-sales.

So just know that they are less regulated.

Your level of comfort will depend on the fine print in the contract.

As with any equity extraction, legal advice is a must.

Because there is no interest on the non-loan, you will share any capital gains on the sale of your property with a home reversion provider.

When the property is sold, they will get the relevant percentage of the proceeds.

This is probably obvious - that’s the deal – but it’s worth pointing out. Remember that your ultimate proportion could change far less than with a reverse mortgage (see here for how your debt can grow with a reverse mortgage).

But think about the up-front timing of it all. You are immediately, instantly in debt for the designated amount to a home reversion provider; it may take years to owe the same amount of money to a reverse mortgage provider.

So what conditions are conducive to either a reverse mortgage/home equity access scheme versus a home reversion scheme?

How the property market affects your debt

What you think may happen to the property market could and probably should factor into your equity extraction method of choice.

Home reversion scheme providers win when they snare and share in a big property price spike.

If prices stay broadly flat, you will pay very little more than the dollar amount you received at the outset – home reversion could be a relatively cheap option.

That’s the home reversion sweet spot for you.

However, if you expect rampant real estate prices, a reverse mortgage could be more ‘affordable’… in that your equity could stay high regardless of the rolled-up interest.

The level of that interest will be key as well. Where a reverse mortgage has a variable interest rate, a cut to that interest rate will of course consume less of your home.

For you, the planets aligning with both of those variables is when a reverse mortgage may have the edge. (Don’t miss the fact that there is no interest on a home reversion product, therefore you don’t have to care about the future direction of interest rates.)

Age matters

Another key determinant of your decision is simply your age.

Reverse mortgages are typically available younger with some products even accessible from age 55.

Home reversion products might not be on offer until age 65.

Note that the government’s home equity access scheme is not an option until you reach pension age at 67.

It is always vital though to check what happens to a surviving spouse. Ensure there can be no forced sale.

All three equity extraction options on offer to you are slightly different and will cost differently.

That cost, how much you can get, and how you get it - a lump sum or periodic payments - may well determine the best one for you.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

^{Advice given in this article is general in nature and does not take into account your personal circumstances. It is not intended to influence readers' decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.}

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