How Home Reversion Equity Release Schemes Work and Why They Offer More Certainty Than a Mortgage

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Home reversion schemes are less popular than life time mortgages for releasing equity tied up in homes. This is because the plan involves selling all or a part of your property. The capital released is always much less than an independent valuation, but you will not need to make any payments as you will be given a rent free tenancy for life or until the property is sold.Home reversion equity release schemes are much less popular in the UK than lifetime mortgages and thought to represent a fraction of total equity release plans in the UK. This is probably due to the psychological effects of selling your home or a part of it at a discount to its true value in return for cash up front. But there is of course no rent or mortgage to pay. Also until recently it has been difficult to compare a home reversion a like for like basis with identical amounts released through a lifetime mortgage. However a new comparison calculator allows you to see how the two schemes perform between one year and fifty years. The bottom line is that if you live far longer due to developments in medical science and future property values remain stagnant, you would not hesitate to choose a home reversion scheme. One feature that a reversion offers that a lifetime mortgage cannot is certainty.The home reversion investment company will offer a larger cash amount based on the valuation for older people because they do not have to wait as long to get a return on their investment. The amount of the purchase price therefore reflects the life expectancy of an older person and the time taken before the property is sold.The amount of money you have sacrificed under valuation is similar to paying rent as a single lump sum in advance for your lifetime in the property. This is because the investor does not get any return on their money until the house is sold and of course this is unknown. For example if an investor (home reversion purchaser) is seeking a return of say 7% compound on their money, they would first estimate how long you may live. So if you are a single male aged 74.5 years old in average health for your age, you would be expected to live for approximately 10 years according to recent government statistics. So in this example if your home is valued at say 200,000, the home reversion company could purchase the whole property from you for a fraction under 102,000.If the 102,000 was invested say in a bank deposit for a guaranteed return of 200,000 after 10 years this would represent an annual return of 7%. 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 reversion investor would also obtain a quicker return if the property is sold early due to premature death or the need for residential care. Conversely the equity release reversion company would lose out if property values fall and the occupant remained in the property longer than expected.Many home reversion schemes companies offer a variety of knobs and whistles. Such as the ability to move to another property which is a requirement if they are members of S.H.I.P. (Safe Home Income Plans). Some will provide the option for your estate to receive an extra sum if you die early, move into residential care or wish to vacate the property early. Most reversion investors allow the facility to take a partial equity release through a home reversion plan with the option to cash in more bricks at some future date when property prices may have increased. Also your cash released as a percentage of the valuation will be greater as you get older.The Equity Release Analysis Centre provides you with a complimentary calculator that helps you to compare a home reversion scheme with an equity release lifetime mortgage. Your independent adviser can obtain quotations from both types of equity release based on the same amount of cash benefit so you can analyse the two on a like for like basis.

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