Money
Home-reversion schemes
Introduction
Home-reversion schemes are an equity-release product - they allow you to exchange equity in your home for cash.
With equity release mortgages you remain the owner of your home - with home reversion schemes you sell part or all of your home. The schemes have been offered before and may be making a comeback. Investors and homeowners should be wary.
What's involved
The idea behind a home-reversion plan is simple. You own your home but have no savings and need cash. You agree to sell your home but are allowed to remain living there as long as you want. You get a cash lump sum immediately and may get periodic payments until such time as you no longer live in the house.
Not always simple
Not all home-reversion plans are straightforward. Some may require you to pay rent to the new owner. Some may require you to sign up to the deal today but defer the actual sale for years so you have no real idea what you will be paid for the house.
Usually a company puts these deals together, either by finding a buyer for you (for a fee) or by buying the house from you.
Home-reversion plans can be marketed to property investors looking to buy property indirectly (by investing in the company) or directly. But – as investors in failed property schemes like Blue Chip and Merlot have found – the risks in property deals are often far from clear. While home reversion is a simple concept, it could become a nightmare investment.
Who offers them
Home-reversion schemes are rare in this country. Wellington-based company Silver Choice offered a niche product in the past, but managing director Richard Withell told us the company was not actively marketing it. The Silver Choice product was based on deferred sales and required those who sold their homes to pay rent after the property changed hands.
Rob Dowler, executive director of SHERPA (Safe Home Equity Release Plans Association), says home-reversion schemes could join SHERPA if they complied with the SHERPA code of practice. That means, among other things, any such scheme will have to guarantee the right to occupy for life (see Reverse mortgages for more on this).
Key risks
Any home-reversion scheme that requires homeowners to pay rent once they become tenants in their home poses significant risks for retired people. The rent payments will have to come from the money they receive from the sale – either directly from this money, or from interest if it’s invested. If this money runs out and there’s no guaranteed tenancy for life, they face the prospect of having to move out.
Home-reversion plans have been available in the UK for some time. Many appear to include a rent-free guaranteed tenancy for life – a feature we’d like to see in plans sold here.
Our advice
- You need to get expert independent advice about a home-reversion plan – just like you do for any financial product.
- All home-reversion plans should guarantee a rent-free tenancy for life, to protect retired people. If they don't, don't sign up.
More information
- Safe Home Equity Release Plans Association (SHERPA): www.sherpa.org.nz
More from consumer.org.nz
Report by Susan Guthrie.