To appreciate the real value of a home reversion plan it helps to understand how they are priced. The home reversion provider pays the customer a lump sum at the commencement of the plan. The provider then waits for many years before receiving an unknown return at an unknown date in the future, which is usually 10-20 years later.
To determine how much to pay the customer, the provider first inflates the current property value by an amount to reflect house price growth over a period of time (equal to the customer’s life expectancy). This notional future value is then discounted to reflect its current value. Depending on the customer’s age and sex and allowing for costs, the cash payment is usually between 40-60 per cent of the current open market value. The customer receives less than the full market value to reflect the value of a ‘rent-free’ lifetime lease.
Two transactions
When a customer enters in to a home reversion transaction they are completing two simultaneous legal transactions. They are selling all or part of their beneficial interest in the property and entering into a lifetime lease. These two transactions provide two separate benefits – a cash lump sum (or possibly an income), and the granting of a rent-free lifetime lease on their home.
The table to the right shows the net present value (NPV) of future rent (the period of rent being the same as the customer life expectancy) for a property worth £200,000. As a client pays no rent under a home reversion scheme, this figure is the notional value of the rent-free lifetime lease in these examples.
Understanding the combined value of the cash released and the lifetime lease helps the customer recognise the true value of a home reversion plan. In the examples shown in the table, the cash released and the notional rent figure, when added together, equate to more than the current market value of the property. These examples demonstrate that a home reversion plan can offer real value for money.
In the past equity release schemes have been criticised as offering poor value for money, but this recent research goes some way to dispelling that myth.
Certainty
As well as providing a cash lump sum and a rent-free lifetime lease, a home reversion plan can provide a customer with additional certainty. And certainty is a commodity that should never be underestimated when dealing with the elderly.
Subject to not releasing all their equity on commencement, a home reversion plan can provide the customer with the ability to leave a legacy and/or access to further releases of capital. With a lifetime mortgage leaving a legacy and providing future releases are dependent on future house price inflation, as any available equity could be eroded by even a relatively low rate of interest being rolled up in a period of low house price inflation.
In the current climate of lower house price inflation expectations, home reversion plans appear to offer improved value for money. When you take into consideration the value of the lifetime lease, guaranteed further releases and guaranteed legacy, it becomes evident that home reversion plans can offer good value for customers looking for certainty in their financial choices.
