Home reversion plan: How can I use my home to fund care?

If you find yourself in a position where you need long-term care, you are aged over 65 and own your own home, using a home reversion plan can be a way for you to fund your care.

What is a home reversion plan?

A home reversion plan, also referred to as a home reversion scheme, is a type of equity release which allows you to use money that is tied up in your home to pay for care without having to move out. 

Through a home reversion plan, you can either sell a share of your home, or all of your home, at less than its market value to a home reversion provider in return for a tax-free lump sum, regular payments or both.

You can then use the lump sum or regular income from the home reversion plan to pay for your care.

This means that you can keep living in the comfort of your own home and receive care in familiar surroundings, until you move into full-time residential care or pass away.

In some cases, you will pay rent back to the lender to continue living in your home, but this varies between plans.

As with any type of equity release, there are both benefits and drawbacks, and it comes with financial risk. Before you commit to taking out a home reversion plan, it is recommended that you seek independent financial advice.

Why do you get less than market value with a home reversion plan?

With a home reversion plan, you’ll usually be able to borrow between 20-60% of the market value of your home. The older you are, you’ll typically be able to borrow a larger percentage of your home’s market value. This is because the property is likely to be sold quicker.

This may seem like a disappointing amount, but the lender won’t take any money out of your home until it is sold. This means that when they lend you the amount of money you agree to, they’re taking a risk on whether they’ll get this same amount back when the time comes to sell.

So essentially, instead of charging interest, the home-reversion company loans you money below market value as the ‘fee’ for accessing the funds and to guarantee their own investment.

What happens when my property is sold? 

When your house is sold, either because you move into a care home or pass away, the home-reversion company will take back the same percentage of the sale price as what was originally borrowed.

It’s important to bear in mind that this may be more than the amount you were lent.

If the value of your home has increased since you agreed to the equity release, the lender get back more than the amount they lent to you.

For example:

• You sold 50% of your home to the home reversion company at a lower than market value amount of £200,000.
• 7 years later your home is being sold and house prices have increased, which means that 50% of your property is now worth £325,000 at market value.
• The lender will receive £325,000 from the final sale as this is the percentage amount that you sold to them.
• Any remaining proceeds will then come back to you, or go to your beneficiaries if your home is being sold after your passing.  

If you sold the whole home to the home reversion company, they would receive the entire proceeds of the final sale, regardless of any fluctuation in house prices.

Home reversion: Choosing payment options

The money that you obtain through a home reversion plan can be used in a few different ways.

You can choose to:

• Take the money as a lump sum.
• Receive regular payments.
• Receive a mixture of the above.

There are advantages and disadvantages to each option. Which is best for you will ultimately depend on how you wish to use the money as well as how you best think you can manage it.

Consider the following:

• Taking out only a lump sum means you have the freedom to manage the money yourself, but you may not have much of it left if you live for many years.
• If you choose to receive regular payments, it gives you the reassurance that you will have an income for the rest of your life. However, if you pass away soon after releasing equity and have only received a low number of payments, you will potentially have lost a significant amount from your inheritance for little benefit (because you sell a share or all of your home at less than market value).

It is important to note that some companies may offer protection against passing away early after taking out a home reversion plan. Make sure you read the terms and conditions of the plan before you agree to anything, and consider your needs now and in the future.

What are the pros and cons of home reversion plans?

There are pros and cons to taking out a home reversion plan. It is a high-risk product and may or may not suit your personal circumstances. It can work well for some people.

Pros of a home reversion plan include:

• You can withdraw money tied up in your home without having to sell it.
• You get tax-free money to fund your care.
• You can remain in your own home for life (or until you move into residential care).
• You do not have to sell all of your property, saving some for your inheritance.

Cons of a home reversion plan include:

• If you take out a home reversion plan, it could impact your eligibility for local authority funding and entitlement to certain benefits.
• You will no longer be the sole owner of your home.
• You receive less money than the market value for your home.
• Your inheritance will no longer include your home.

These are only some of the advantages and disadvantages of taking out a home reversion plan. It is a major decision and it’s advisable to seek independent financial and legal advice before committing to anything.

The Financial Conduct Authority (FCA) is the UK’s regulator of financial services, including home reversion plans. You can search their Financial Services Register to get independent advice.