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print article145-E Reversed mortgages

 

0145-E Reversed Mortgage

About Reverse Mortgages

A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment.

 

The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. Eligible property types include single-family homes, qualified condominiums, and townhouses.

 

Equity Release covers two types of loans -

This page will be looking in more detail at Home Reversion Schemes. What they are, how they work, buying tips and tactics, their advantages and perhaps more importantly their disadvantages.

Remember, with any financial product the real story, and often the key to getting a better understanding and price, is normally dependent on learning about their disadvantages first.

What are Home Reversion Schemes
A Home Reversion plan is where you sell your home or a percentage of it to a Reversion company but retain the rights to live in it rent-free for the rest of your life.

The money received can either be paid out in a cash lump sum, a monthly income, or a combination of the two.

The reversion company is unable to sell the property until both you and your spouse are dead or you decide to move into long term care. This means that you will not receive the full market value for your property as the Reversion company might have to wait 10, 20 or even 30 years before they can sell the property and make a profit.

The payouts range between about 20% - 60% of a property's value and depend on many factors, the main one being the age of you and your partner. The older you are the more of a percentage you'll receive and vice versa. This is common sense as collectively 65 year olds have a longer life expectancy than those aged 80.

The minimum qualifying age for Home Reversions are therefore higher than for Lifetime Mortgages.

How do they work
Under a Home Reversion scheme you sell the legal ownership to a Reversion company and become a tenant.

This is not a cause for concern because an iron clad legal document is signed, called a lifetime lease. This gives you the right to continue living in your property until you or your spouse dies (whoever lives the longest), or you have to move into long term care.

However, even though you are only the tenant you will still be responsible for upkeep of the property and all associated bills and outgoings relating to it.

How much can I expect to receive from my property

This depends mainly on your age and the age of your spouse if married.

The range is between about 20% and 60%. That means if your property is worth €100,000 and you sell 100% of it to a reversion company you'll receive between €30,000 - €60,000.

As pointed out in the introduction this is because the reversion company cannot sell the property while you still live there. It may then be many years before the company can turn a profit.

In effect a reversion company is paying a discounted price for an asset which it can only sell at some stage in the future.

Health is an important factor

The state of your health is an important factor when thinking about a home reversion scheme and so needs to be considered carefully.

For example, experts believe that about 40% of people who opt for home reversion could benefit via receiving a higher percentage on their property because of their medical condition(s). For example -

  • A 68 year old male who has had one heart attack and suffers from a non-life threatening kidney disease might be offered a lump sum of €180,000 on a property worth €300,000
  • That is 60% based on the assumption that 100% of the house has been sold to the reversion company
  • But if his medical conditions were certified the lump sum could be boosted by 10% or more
When it comes to Home Reversion schemes both old age and poor health are a benefit as more cash can be raised.
You don't need to sell all of your property

Many people use Home Reversion schemes to release only part of the property's value. For example, you can elect to sell 20%, 30%, 50% or the full 100%.

Selling 100% will obviously pay the most money but on your death there will be nothing left of the property's value to pass on to any beneficiaries.

But if you sell 25% and retain 75% ownership, this can be passed on to whoever you wish. Also, by selling only 25% you have the option to sell more of your property in the future.

This makes sense because as you get older the percentage you get paid of the current property's value will increase. For example, if you're presently 70 you'll probably receive around 40% of the market value. But if 75 this might increase to 45%.

A Home Reversion example

John's property is worth €100,000 -
  • He takes out a Home reversion plan and sells 50% to a reversion company
  • The company pays him €20,000 which is 40% of the value (of half the share, remember he only sold 50% of the property)
  • John dies 12 years later and the property is sold for €150,000
  • The proceeds are split, the reversion company gets its 50% share of €75,000 and John's heirs get the balance, also €75,000
As you can see the Reversion company's gross profit would be €55,000 (€75,000 - €20,000). If you do the maths that's about a 9% annualised yield which is not bad at all. But obviously the reversion company has costs to pay as well.
There is no interest charged

Interest is not charged with reversion schemes because they are neither loans or mortgages. Remember, the reversion company is buying part or all of a property for a discounted value based mainly on life expectancy.

In effect you're swapping an asset - your property - for a cash lump sum.

There is no standard Home Reversion scheme

There is no standard Reversion Scheme and so policies differ from provider to provider. As finance gets more advanced companies are continually offering new ideas and variations.

Competition has also increased over the last 5 years which is always good news for consumers as it normally leads to better prices.

It's therefore important to research what is available, checking out as many providers as you can. As ever, special attention should be placed on the total costs and charges along with the small print.

Never forget that with personal finance products it is these details which can considerably influence the total cost.

Examples of different Home Reversion plans:

  • Some lenders won't pay a cash lump sum. Instead the money is used to buy an Annuity which in turn pays a monthly income for life
  • Others may give you the choice of having a lump sum and an income
  • Some companies won't allow you to sell 100% of your property, their limit might be 80%

 

 

Date Inserted: 19 February 2006
 
Have questions or comments on this article? email me

 

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