Sale Model ERS – Home Reversion Schemes

Home reversion schemes permit consumers to sell part of their home at a fixed price which usually requires the acceptance of a greater discount than is involved in the current value of the share of the home. Consumers do not borrow against the value of their homes, but are actually transferring (selling) part of their property and as such they are not obliged to make any repayments. Borrowers continue to occupy these houses for the rest of their lives and can use the cash received for their household expenditure. In the case of home reversion schemes borrowers receive the sales proceeds as a lump sum excluding any withdrawal in instalments.

These  schemes offerthe borrower the option to choose between a fixed-share or variable share contract. Under a fixed share contract, the home reversion company pays the borrower a lump sum in exchange for a fixed share of the home. The percentage of the share remains fixed from the beginning to end, regardless of the borrower’s life expectancy or the future value of the property. Under a variable share contract, a borrower is paid a comparatively higher lump sum at the sales date of the respective share in the property, however, the home reversion firm automatically increases its share each year without having the obligation to recompensation. Over time this reduces a borrower’s share in the property. Thus, the longer the borrower’s life, the smaller will be the part of property, he/she owns.

The table illustrates the advantages and drawbacks of home reversion schemes. One of the biggest drawbacks of such a scheme is that a borrower can neither change nor terminate a home reversion contract since the property has already been sold. However, borrowers may have an option to negotiate with the Home Reversion Company to buy back the share which had been sold earlier thus allowing the borrower to sell the property in the open marketplace. This would provide a borrower with a choice to cash in the value from one’s ownership in the property. When the borrower dies, the same option of buying back may be given to beneficiary(ies) (CCPC, 2016).

Advantages Drawbacks
A borrower can raise cash by selling a share of the property and can still continue to live in it without paying any rent. The money lent to a borrower will be considerably less than the market rate of the share in the property. The difference between the market value and the lump sum is the true cost of this product. If one does not live long, it may prove to be very expensive.
If property prices fall, a borrower will gain due to having received a sum of money based on a higher price. A borrower will not gain from a rise in property prices. The home reversion company will receive the entire benefits from the rise in the value of its share.
It is no loan. Therefore, neither repayments no interest payments are claimed. A borrower cannot use the property as a security to receive a further loan once again without the consent of the home reversion firm (co-owner).