Reverse Mortgage versus Home Reversion Scheme: what is the difference?
I am often asked for my views on other forms of equity release. I am on the record saying that downsizing can be a good option for seniors to consider, but another option that occasionally comes up, and sometimes gets confused with a reverse mortgage, is ‘home reversion’.
What is home reversion?
Under home reversion, you agree to sell a portion of your home in return for a lump sum payment. The homeowner is effectively selling a share (typically 25% – 65%) of the future value of their home to the provider, with any future growth in property value shared.
It is important to understand that you will receive a reduced or ‘discounted’ lump sum payment in exchange for a fixed proportion of the future value of your home. For example, you may sell 65% of the future value your home, but only receive somewhere between 25% and 40% of the value up front depending on your age. Funds are only advanced in the form of a lump sum.
How does this compare with a reverse mortgage?
With a reverse mortgage, you continue to own 100% of your home, and benefit from any growth in its value. Rather than selling a portion of your home, you take a loan against it. You have the flexibility to drawdown funds as a lump sum, regular advance or have money set aside in a cash reserve facility for future needs or unforeseen expenses. Interest is charged on the loan and compounded monthly, however you are free to repay the loan, partially or in full, at any time, without penalty.
Pro’s and con’s
Clearly I am biased; however to me the biggest advantage of a reverse mortgage is flexibility to access funds and to make repayments. A Heartland Seniors Finance reverse mortgage is also available across all capital cities and major regional cities across Australia, whereas home reversion schemes are often restricted to Melbourne and Sydney and certain property types. A reverse mortgage is relatively simple and transparent compared to home reversion.
Under home reversion, you may be able to release more than you could under a reverse mortgage. Also, some people really do not like the idea of having debt in retirement and are put off by compounding interest. For these people home reversion is an option to consider from an emotional, rather than financial perspective. It is worth noting that when borrowing a modest amount (say 20% of the home value – which is more than the average) and house prices increase at a conservative 3% rate of a year, the growth in property value will outpace the compounding interest for 30 years, even assuming an interest rate of 7% (0.7% higher than current levels). This example is in nominal terms, without inflation adjustment, and just for illustrative purposes – for a personal projection please contact us or visit ASIC’s Money Smart website.
We also find that the most popular use for a reverse mortgage is for home renovations, repairs and maintenance. The great thing about this is that it often increases the value of your home. Using home reversion for equity release will see the provider benefit from your investment.
What to look out for?
Reverse mortgages are a credit product and are therefore heavily regulated. As a reverse mortgage provider, Heartland Seniors Finance supports this regulation as it protects customers and ensures people make an informed decision.
Home reversion schemes are a property transaction and are less regulated.
Under a reverse mortgage legal advice is mandatory. I would urge anyone considering home reversion to seek legal advice, discuss it with their family and to seek the opinion of a mortgage broker or financial adviser.
Also ensure that you have lifetime occupancy. The most popular home reversion scheme offers this, however there are some that have fixed terms and should be avoided as your circumstances may change.
So what is the answer?
Home reversion can be a valid way to release equity and assist you live a better retirement. They are however less flexible, more complex and have more restrictive criteria. It is very important to seek independent advice and to do your research so that you make an informed decision.
Information provided is accurate as at 19 September 2017 and may change from time to time