Home Reversions schemes
Home Reversions schemes have been popular in the UK, however very limited in Australia. According to ASIC’s Money smart website there is currently only one home reversion scheme provider in Australia partly owned and backed by a bank. At the time of writing, home reversion schemes are only available if you live in certain areas of Sydney or Melbourne.
A home reversion is where you sell a percentage of your home in return for a discounted lump sum to enable you to continue to enjoy your home and benefit from the release of capital. Home reversions are a little more difficult to understand than reverse mortgages and can have greater financial ramifications regarding the age pension testing criteria. It is important that you remain the sole owner of the property on title to protect your interests should the company become insolvent.
So for example, if your house is currently worth $400,000, depending on your age, the provider of the home reversion may offer to purchase up to 65% of your home ($260,000) for a discounted rate of up to 40% of the dollar value. So if you were to sell 65% the home reversion scheme may buy that $260,000 share in equity for a discounted $156,000. The reversion scheme is $94,000 in front.
As the co-owner the home reversion scheme will also be entitled to up to 65% of the capital growth from the original value of $400,000. So if the property appreciates in value between now and the time you decide to sell, the home reversion scheme also benefit by receiving up to 65% of the capital growth.
The eventual cost of the home reversion is difficult to estimate as it will depend on the actual capital growth and eventual sales price of the property. The great the percentage sold the greater the cost for the home owner.
So why would one consider a home reversion scheme?
A home reversion may enable you to access a larger lump sum pay out than other forms of equity release while still enabling you to enjoy the benefit of owning your own home. Depending on age, other forms of equity release may not provide sufficient funds for major expenses such as specialist medical treatment or aged care accommodation bonds. Home Reversions may also be suitable if your existing mortgage is greater than the thresholds allowed by reverse mortgage lenders or the SURE Property Option.
In a slow moving market or high interest rate environment the benefits of home reversions schemes can provide more predictability. Because there is no lending as such there is no interest rate risk. This enables you to at least protect some of your remaining equity.
As home reversions are an equity share arrangement, you can still benefit from some capital growth in your property at the reduced ownership split. This may help your preserved equity grow to keep pace with inflation, however there is no guarantee property values will continue to increase over the term of the agreement and often you have already sold off a share at a substantial discount.
So what are the disadvantages of a Home Reversion?
Firstly you are selling a percentage of your property for a substantial discount. Unless have already eliminated other options and you require a large lump sum amount, it is always beneficial to compare financial models of other forms of equity release to meet your current and future financial needs.
Should you exceed your life expectancy, the initial lump sum may provide less that what may have been possible through another forms of equity release that provide progressive payments rather than large lump sums.
Large Lump sums may have significant financial ramifications on your aged pension eligibility, entitlements and pension payments. Depending on what you do with your new cash reserves, these funds my fall under the deeming guidelines.
Liquid Cash funds are easily spent and can erode quickly over time. You are still required to maintain the home in good repair which may become an issue if all the initial funds are spent.
If property prices stagnate, and you only benefit in a percentage of the capital growth of your property, you may no longer have the means to meet future age care medical costs.
You will still have financial uncertainty regarding future income and wealth.
Property Reversion Schemes are only available within specific postcodes and properties in Melbourne and Sydney.
