Mortgage Glossary: Reversionary home income plan

Reversionary home income plan

Many elderly people find themselves "house rich but income poor" when they approach retirement. In other words, they have the bulk of their wealth tied up in their home when what they really need is an income to boost their standard of living in retirement.

Home income plans allow homeowners, especially the elderly, to release equity which they have built up in their home without having to sell it.

The answer is a re-mortgage. By increasing the size of their loans, borrowers can release capital which then goes to buy an income.

There are two types of home income plan - reversion and annuity.

Reversion:

Through this route, the home is sold to an insurance company which pays an income to the owner. When the owner dies, the life insurance company takes ownership of the property.

Annuity:

With this scheme, a mortgage is secured on the property (or a re-mortgage). The proceeds are used to purchase an annuity to produce an income. The ideal situation is for a portion of this income to be used to service the debt. Then, when the homeowner dies, the debt can be repaid. As with all annuities, the older you are, the higher the income you can achieve. For this reason, home income plans are more likely to be appropriate for people in their 70s.

Home income plans involve risk. The value of your home could fall. Mortgage rates could increase sharply so they're probably only desirable for people who need extra income but have no other way of achieving it.

There's been controversy in recent years and allegations that some home lenders advanced loans as part of home income plans to people for whom they were not suitable.

As a safeguard to protect investors, the main specialist home income plan providers devised a collective initiative called "Safe Home Income Plans"(SHIP). Participating companies must observe a code of practice which obliges them to provide fair, simple and complete presentation of their schemes. As a further safeguard, a solicitor must check your plan before you sign up.

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