Reverse mortgage and home reversion are two equity release options seniors can consider when transitioning into retirement. Here are their similarities and differences.
Although downsizing can be a good option for seniors when transitioning into retirement, knowing about various forms of equity release can also be beneficial. Another option that comes up and sometimes gets confused with a reverse mortgage is home reversion.
What is home reversion?
Under home reversion, the homeowner agrees to sell a portion of their home in return for a lump sum payment. They are selling a share, usually 25% – 65% of the future value of their home to the provider, as well as any future growth in property value shared.
The homeowner will receive a reduced lump sum payment in exchange for a fixed portion of the future value of their home. They may sell 65% of their home’s future value but only receive between 25% and 40% of the value up front, depending on their age. Funds are only drawn as a lump sum.
Comparison between a reverse mortgage and home reversion
The homeowner continues to own 100% of their home with a reverse mortgage, as well as benefit from any growth in its value. Rather than sell a portion of their home, they take a loan against it. The homeowner has the option to drawdown funds as a lump sum, regular advance, or a cash reserve for unforeseen or future expenses.
The interest is charged and added to the loan each month. The homeowner is allowed to partially or fully repay the loan at any time without penalty.
Advantages and disadvantages
The advantages of a reverse mortgage are the options on how to access funds and to make repayments. While home reversion is usually restricted to Melbourne and Sydney on specific property types, an ASAG reverse mortgage is available across all capital and major regional cities in Australia. Compared to home reversion, a reverse mortgage is much simpler and transparent.
With home reversion, the homeowner may be able to release more than they could under a reverse mortgage. Also, most people don’t want to have debt in retirement and are bothered by compounding interest. They think home reversion is considered from an emotional perspective rather than financial.
The purpose of a reverse mortgage is usually for home repairs, renovations, and maintenance. The good thing is it often increases the value of the home. Using home reversion for equity release will benefit the provider more from the homeowner’s investment.
Reverse mortgages are heavily regulated as a credit product and ensure lifetime occupancy. ASAG supports this regulation to protect customers and make sure they make an informed decision.
Home reversions are less regulated as a property transaction. Popular home reversion schemes offer lifetime occupancy, although some have fixed terms which should be avoided.
Legal advice is required under a reverse mortgage. It’s recommended for anyone who considers home reversion to seek legal advice, discuss it with their family, and consult a mortgage broker or financial adviser.
Home reversion is able to release equity and help someone in retirement. However, it’s more complex, less flexible, and has more restrictive requirements. It’s vital for customers to do more research and seek independent advice to make an informed decision.
If you liked our “Reverse Mortgage Vs Home Reversion” and took away some useful information, check our blog space regularly for more updates on reverse mortgages and equity releases.