Showing the value of home reversions

An important requirement of the Financial Services Authority\'s MCOB rules is that brokers should consider with their clients the effects releasing equity may have on their estates when they die.

There are many ways to address the question of inheritance but the first step is to identify how important it is to clients and their families and how they want to handle it with regard to their properties.

After this, brokers can address the inheritance issue in one of two ways – through protected lifetime mortgages or with home rever- sion schemes.

I have discussed protected lifetime mortgages in the past so I’ll take this opportunity to look at home reversions.

If clients look at home reversion schemes in a superficial way they willsee them as plans where they sell shares in their properties for under their market value.

At this point in the research pro-cess, their analysis usually ends. But if inheritance is identified as a priority, brokers can draw a comparison between lifetime mortgages and home reversion products over a specific period of time.

They can show clients the effect of property price fluctuations, the overall cost of releasing funds from the home and ultimately the level of inheritance that can be preserved.

The illustration below showing property prices staying level, rising or falling over a 20- year period goes to show the importance of comparisons when choosing products. The example in the table is based on a property worth £250,000 and a customer wishing to raise about £60,000 using an equity release arrangement.

The interest rate used for the lifetime deal is 6.8% and the percentage of the property sold for reversion is 60%.

While comparisons provide varying results, this shows why home reversion should be considered as an alternative to lifetime deals.