Using Your Home to Cover Your Home Care Costs
Many people choose home care to enjoy their independence in the comfort of their own homes. Therefore, downsizing is out of the question. Home reversion plans offer access to a portion of the value of your home without having to move or sell your entire property.
Our guide highlights the home reversion procedure and the benefits and risks associated with the process.
Home Reversion Plans
Home reversion is a form of equity release that allows people over a certain age to sell a portion of their property in exchange for a cash lump sum, a fixed income, or a combination of the two. It also offers the right to live at the property without paying rent for the rest of their lives.
The Process of a Home Reversion Plan
A home reversion provider will make you an offer below market value for a percentage of your property. Once you agree on a price, you will have the choice between a tax-free cash payment, regular income payments, or a portion of cash upfront followed by payments.
Once Your Home Reversion Is Finalised
Once you have signed the contract, you will be leasing the property, rent-free, for the rest of your life or until you decide to sell the rest of your share. The provider will receive the agreed-upon share of the final sale price once the property is sold, leaving the remainder to you or your estate.
Your Percentage
Depending on your health and age, you will receive between 20% and 60% of the market value of your property. The older you are when you start the reversion process, the higher your percentage.
Reversion companies base their prices on the level of risk they take, as they cannot pre-determine when they make their money back since they cannot sell your home until you die or move.
Lump Sum Payments
You may choose to receive your home reversion payment as a cash lump sum upon closing. A lump sum allows you to manage your money as you wish, which is ideal for older individuals with minimal expenses.
If you are in good health with many years ahead of you, this may be challenging to divide evenly over the years.
Regular Income Payments
Many people who choose home reversion plans will take their payment as regular income, ensuring they always have money coming in to cover their needs.
However, if you die soon after your reversion, you risk losing a large sum of your inheritance for the minimum in return. Although, you can implement a protection plan to prevent this.
Combination Payments
A combination payment is a safe and flexible option that allows you to receive a partial cash payment followed by regular income payments. It provides the ability to have manageable cash on hand, with the security of knowing you have money coming in.
Understanding the Details of a Home Reversion Plan
A home reversion plan is high risk and can have significant implications for your financial planning, inheritance, and tax benefits. It’s important to get independent advice before taking on this type of equity-release strategy.
You should also consider the various advantages and disadvantages before deciding if a home reversion plan is right for you.
Home Reversion Plans Pros and Cons
Home reversion plans come with their own set of pros and cons. Deciding whether a home reversion plan is suitable for your situation depends on whether the risk outweighs the benefits a reversion can provide for your unique needs.
The Pros of Home Reversion
Several vital factors of home reversion plans may be beneficial to individuals looking for a reliable way to fund their necessary home care.
- Tax-Free Money to Fund Your Care. A home reversion plan allows you to receive tax-free money that can be used to fund your home care needs. You may also remove your home from your estate to reduce inheritance tax complications for your loved ones.
- You Remain in the Comfort of Your Home. As people get older, they prioritise the comfort only home can provide. Home reversion plans allow you to get the funds you need to receive home care without sacrificing the familiar place you feel best. With a home reversion plan, you can have peace of mind knowing you never have to move again.
- You Don’t Lose the Entirety of Your Inheritance. A home reversion plan allows you to keep a portion of your property that can be put towards your inheritance. You can even implement specific procedures to protect the estate left for your family.
- The Older You Are, the More Value You Receive. Home reversion plans are ideal for older people, as the longer you wait to take out a reversion plan, the more money you will be able to release.
The Cons of Home Reversion
Before pursuing a home reversion plan to cover home care expenses, it’s important to note the risks and costs associated with home reversion plans.
- More Money Now, Less Money Later. While it is nice to receive money upfront to cover necessary care expenses, a home reversion plan prevents you from receiving your home’s market value, which can be a significant loss with the unpredictable nature of the housing market.
- Buying Back Your Shares Can Be Costly. When you opt for a home reversion plan, you sell your home shares to a reversion provider. Down the line, you may decide you want those shares back to put towards your inheritance, and it could be a costly process.
- You No Longer Own Your Property Alone. One of the benefits of buying a home is the ability to be the sole owner with full rights to the property. A home reversion takes away that power and leaves you only owning a portion of the place you consider yours.
- Your Benefit Eligibility May Be Affected. A home reversion may affect your income and capital overview, affecting your eligibility for several benefits or support and resources from your local authority.
- There May Be Hidden Fees. Home reversions often entail hidden fees, such as arrangement payments, valuation, and legal fees. Lenders will also require you to keep the property in optimal condition, which requires you to put money aside toward repairs and maintenance that can become costly.
The Alternative to Home Reversion – Lifetime Mortgage
A lifetime mortgage is a traditional form of equity release that entails borrowing 18% to 50% of your property’s value and repaying the borrowed amount plus interest with the profit of the sale of your home when you die or move into a care home.
Home Reversion Plan vs. Lifetime Mortgage
Lifetime mortgages allow you to remain the sole owner of your property, allowing you to benefit from any potential property value increases. Home reversion plans are less advantageous in that right, as you will only benefit from price increases on your percentage of the home, as the reversion provider will still hold shares.
The Downside of Lifetime Mortgages
The equity you pull from your home must be paid back with interest. If you do not make interest payments while you still own your property, they may end up costing more than you borrowed. In severe cases, you may find yourself owing the total value of your home.
Who Can Get a Home Reversion Plan?
Home reversion plan criteria may vary depending on the lender you are working with. However, home reversion plans typically have specific standards borrowers must adhere to, such as:
- You and your applicant partner (when applicable) must be over 65.
- You must own your home without a mortgage.
- Your home must be valued above a set amount.
How Can I Get a Good Deal on a Home Reversion Plan?
Before diving into the process of a home reversion plan, it is imperative to discuss your options and seek expert guidance from a trusted mortgage adviser. A mortgage adviser will be able to help you navigate the pros and cons of your unique situation. If you decide to pursue an equity release, they can assist you in finding the best solution.
Are There Other Ways to Fund Home Care?
There are several lower-risk alternatives to fund your home care, such as:
- Downsizing your home
- Insurance policies
- Investment products
- Help from family members
- Grants or subsidised loans
Speak to a Care Professional Today
Arranging home care and managing the associated costs requires a great deal of time and knowledge, as there are so many moving parts to ensure your needs are taken care of physically, mentally, and financially. If you are seeking professional insight, contact us today.