Home reversal schemes are less popular than lifetime mortgages for freeing up equity tied up in homes. This is because the plan involves the sale of all or part of your property. The released principal is always much less than an independent valuation, but you won’t need to make any payments as you will be given a rent-free tenure for life or until the property is sold.
Home reversal equity schemes are much less popular in the UK than lifetime mortgages and are thought to represent a fraction of all UK equity release schemes. This is probably due to the psychological effects of selling your house or part of it at a discount to its actual value in exchange for cash up front. But of course there is no rent or mortgage to pay. Also, until recently, it has been difficult to compare a similarly shaped home reversal with identical amounts released through a lifetime mortgage. However, a new comparison calculator lets you see how the two schemes perform between one year and fifty years. The bottom line is that if you are living much longer due to advances in medical science and future property values remain stagnant, you would not hesitate to choose a home reversion scheme. One feature that offers a reversal that a lifetime mortgage can’t is certainty.
The home reversal investment company will offer a larger cash amount based on valuation for seniors because they don’t have to wait as long for a return on their investment. Therefore, the amount of the purchase price reflects the life expectancy of a senior and the time it takes before the property is sold.
The amount of money you have sacrificed in the valuation is similar to paying rent as a lump sum up front for your entire life in the property. This is because the investor does not get any return on the money from him until the house is sold and of course this is unknown. For example, if an investor (reversion home buyer) is looking for a return of, say, 7% compounded on his money, he would first estimate how long he can live. So, if you are a 74.5-year-old single man in average health for your age, you are expected to live approximately 10 years based on recent government statistics. So in this example, if your home is valued at, say, $200,000, the home reversal company could buy the entire property from you for a fraction of less than $102,000.
If the 102,000 were invested, for example, in a bank deposit with a guaranteed return of 200,000 after 10 years, this would represent a 7% annual return. However, the investor would expect an even better return because the 200,000 property should also have increased in value after, say, 10 years.
The home reversal investor would also see a faster return if the property is sold early due to early death or need for residential care. Conversely, the equity release reversal company would lose if property values fell and the occupant stayed in the property longer than expected.
Many home reversal scheme companies offer a variety of knobs and whistles. Like the possibility of moving to another property, which is a requirement if they are members of SHIP (Secure Home Income Plans). Some will offer the option for your estate to receive an additional sum if you die early, move into a residence, or want to vacate the property early. Most reversion investors allow the facility to take a partial release of principal through a housing reversion plan with the option to collect more bricks at a future date when property prices may have increased. Also, your cash released as a percentage of valuation will be higher as you get older.
The Home Release Analysis Center provides you with a free calculator to help you compare a Home Reversion Scheme to a Home Release Lifetime Mortgage. Your independent adviser can obtain quotes for both types of releases based on the same amount of cash benefit so that he can analyze the two similarly.
