Home reversion schemes

Selling a piece of your home

In a home reversion scheme you sell a proportion of the equity in your home while you still live there. In contrast, a reverse mortgage is actually a loan.

Before you take up a home reversion scheme you should think carefully about how the scheme will affect your current and future finances and how it will impact your retirement lifestyle.

How home reversion schemes work

You receive a reduced or 'discounted' lump sum payment in exchange for a fixed proportion of the future value of your home.

Because you can only sell a fixed proportion of the future value of your home (for example, up to 65%), the remaining home equity is protected.

Imagine your home is valued at $200,000 and you sell 50% of the future value of your home. Although 50% of the current value of your home equates to $100,000, you will only receive a discounted sum that might range from $35,000-$65,000, depending on your age.

You don't have to make repayments on the money you receive while you live in your home. When your house is sold, you have to give a portion of the proceeds to the scheme provider. So, if 20 years down the track your house sells for $400,000, the provider would get 50% of this amount: $200,000.

There is currently only one home reversion scheme provider in Australia. Home reversion schemes are only available if you live in certain areas of Sydney or Melbourne.

The risks

  • Home reversion schemes can be difficult to understand
  • You don't know what the actual cost is
  • Your circumstances and financial views might change as you age; if you use too much money now, you may find you do not have enough later on
  • Your pension eligibility may be affected by the lump sum you receive and how you use it

How much money can you access?

There is usually a minimum amount you can access, for example, around $25,000.

How much will it cost?

It is difficult to work out how much a home reversion scheme will cost you in the end. The scheme reduces or 'discounts' the money you receive upfront (for example, 35%-60% of the present value of the part of your property that you sell). So if your home is valued at $200,000 and you sell 50% of the future value of your home, you may receive about $35,000-$65,000, depending on your age.

The amount of this discount depends on many factors, including your age and life expectancy.

You also give up the share of the future value of your home you sell to the provider. The more your property grows in value, the more you will end up paying.

Questions to ask the provider

Before you sign on the dotted line, check the following.

Special terms and conditions

Ask if there are any special terms and conditions that restrict what you can do with the money. Find out what happens if you sell your home early or if you sell it for much more than they expect.

Life changes

Check if you need the provider's permission to sell, lease, vacate or renovate your home or have someone move in with you.

If things go wrong

Ask the provider if they belong to an external dispute resolution scheme, such as the Financial Ombudsman Service. Then you will know where to go if you have a problem with the scheme. See how to complain for more information on how to resolve disputes.

Do your own research

Check the following before you sign up for a home reversion scheme.

Social security

Talk to the Department of Human Services' Financial Information Service on how a home reversion scheme might affect your pension entitlements.

Independent valuation

Arrange an independent valuation of your home. If the provider's valuation is too conservative, you will give away thousands of dollars of home equity.

Independent legal advice

Ask your legal adviser to explain the contract so you understand the consequences of breaching any terms and conditions.

Home reversion schemes should not be entered into lightly. Consider your future needs, speak to your family and obtain financial and legal advice before proceeding.

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Last updated: 24 Aug 2015