Equity Release Scheme
Home Reversion schemes are not the most standard, or prevalent, product available in the equity release marketplace. That said, they do offer an alternative to those more standard products and they provide different features and function quite differently than their more standard counterparts.
With a home reversion scheme, the homeowner essentially sells part, or all, of their home to the lender in exchange for a tax-free payment or series of regular payments. The homeowner(s) is able to stay living in the home without paying any rent for the remainder of their lifetime.
Overall, home reversions have lost much of their popularity over time. However, they do offer an alternative to a lifetime mortgage and provide a series of features and benefits otherwise unavailable in the equity release marketplace.
How Home Reversion Schemes Work
When using a home reversion scheme, the homeowner basically sells off a portion, or all of their property to the lender in exchange for a lump sum payment or series of payments. The homeowner becomes a co-owner of the property but is able to stay living in the home for the rest of their lifetime, without incurring any charge for living there. The homeowner must maintain the property while living there.
The lump sum payment(s) received by the homeowner comes with no restrictions on spending. So, the homeowner(s) can spend the money at their own discretion and on anything they want. It can be used to follow through on retirement dreams, gift money or items to family members, pay down debt, or build savings for unforeseen expenses. There are no restrictions on what can be done with the payments. There is no interest charged on the money since this product does not function as a loan like a lifetime mortgage does. The percentage of the property sold off will also not change. When the home is eventually sold, usually when the last remaining homeowner either passes away or moves into long-term care, the profits from the sale are split according to the percentages previously arranged. So, if the homeowner sold off 30% of the home, the lender would receive 30% of the profits from the sale. The homeowner is able to leave their percentage, in this case 70%, to their estate or their chosen beneficiaries. In this sense, retirement mortgages offer homeowners a tangible plan for leaving behind an inheritance, particularly since interest is not accruing on any existing loan balance. With no interest accruing, the homeowner just has to be aware of the percentage being given to their estate rather than factoring in the impact of any interest that would have been added over time.
There are different factors used in determining how much money a homeowner may receive through a retirement mortgage. These factors include the age of the youngest homeowner, the value of the property, the percentage of the property being sold, and the overall health and lifestyle of the homeowner. Generally speaking, homeowners who are older are likely to receive more cash as their life expectancy is shorter.