What’s a Reverse Mortgage & How Does it Work?
With all this talk about reverse mortgages, you might be confused and wonder exactly what it is?
You’re not the only one! With all these new products on the market for retirees, it’s easy to get overwhelmed by all the details.
Not to worry, we’re here to dispel any misinformation and ensure you know exactly what’s what.
As experts in our field, we discuss the following in this article:
Our team of specialist journalists has thoroughly researched the ins and outs of reverse mortgages so that we can give you the latest market insights on this product.
Find out more!
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What’s a Reverse Mortgage?
A reverse mortgage is an umbrella term that is generally used in Canada, Australia, and the USA for what those in the UK call a lifetime mortgage.
It’s called a reverse mortgage because it really works in reverse to a traditional mortgage.
The interest compounds and is added to the original capital value borrowed, which is settled when the borrower passes on or moves into long-term care; it has no set term.
How Does a Reverse Mortgage Work?
A reverse mortgage works by allowing you to access the equity held within your home and uses the property as security for the loan.
The reverse mortgage doesn’t require you to make any repayments, although you can choose to if you wish.
The interest on the capital borrowed is compounded and added to the loan’s value, which is then settled when your property is sold if you pass away or move into permanent care.
Who’s Eligible for a Reverse Mortgage?
To be eligible for a reverse mortgage, you should be a retiree who owns their home outright or have reasonable equity in the house.
Each provider’s eligibility age is different, but as a minimum, you need to be 55 or over; with most providers, the maximum age is 90.
Who Would Benefit from a Reverse Mortgage?
People who would benefit from a reverse mortgage are retirees who find themselves in the following positions:
- Their retirement costs have risen and become significant compared to their income.
- Their savings have been depleted, but a large amount of equity is locked up in their home.
- They don’t have any heirs to leave their homes to.
It’s always important to discuss your financial situation with your financial adviser, who would be best suited to tell you if a reverse mortgage will benefit you.
Who Should Avoid a Reverse Mortgage?
Here’s who should avoid a reverse mortgage:
- Those who can’t find an accredited provider or trusted loan program.
- People who want to leave their property to their beneficiaries one day but don’t want to impact their inheritance.
- Those who have family that live with them who’ll need to stay in their home even if they pass on or move into permanent care.
- Those with another source of income or savings can cover their retirement expenses.
Reverse mortgages aren’t for everyone, and if not used correctly for the right reason, it can cause more trouble than it solves.
Types of Reverse Mortgage
There are 3 kinds of reverse mortgages: drawdown, lump sum, and enhanced.
Drawdown plans are available to those over 55 and are secured against your home.
With a drawdown option, you will be paid an initial lump sum, and then the cash balance will remain in a drawdown facility to withdraw as you need it.
The benefit of a drawdown plan is that you only pay interest on the funds withdrawn and not the total amount approved.
A lump sum or roll-up plan is also secured against your home.
The equity you release from your property will be paid out to you as one tax-free lump sum.
The interest that’s charged on the capital amount will roll-up and be added to the capital amount.
The total is then settled using the proceeds from the sale of your home, should you pass on or move into long-term care.
An enhanced option is designed for retirees whose health is not in great shape.
Owing to their ill-health, they are eligible to release a higher percentage of the equity in their homes to assist them.
What Is Required for a Reverse Mortgage?
You’re required to have the correct property type and be the right age to qualify for a reverse mortgage.
Remember that you’ll need to pay the reverse mortgage application and process fees.
Here’s more information.
You’ll need the correct property type to qualify for a reverse mortgage.
Your home must be owned by you, be your principal residence, and have a reasonable amount of equity available.
Age, Equity, & Fees
You need to be over 55 to qualify for a reverse mortgage.
Your home needs to be owned by you either in full or with a large amount of equity available.
Payable fees include:
- A fee for mortgage arrangement.
- Valuation fees.
- Solicitor’s fees.
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What Are the Main Advantages & Disadvantages of a Reverse Mortgage?
The main advantages of a reverse mortgage are that you get to release the equity tied up in your property while retaining homeownership.
All the interest charged on a reverse mortgage can be added to the original loan amount, and you don’t have to make repayments.
The disadvantages of a reverse mortgage are that loan costs are very high compared to other financing options, and you reduce your inheritance to your beneficiaries.
What Are the Costs of a Reverse Mortgage?
The costs of a reverse mortgage are:
- Mortgage adviser fees.
- Property valuation costs.
- Arrangement fees.
- Legal costs.
- Closing costs.
These costs typically add up to between £1,500 and £3,000.
How Much Can I Borrow With a Reverse Mortgage?
How much you can borrow with a reverse mortgage depends on your provider and the plan you choose.
You won’t be able to borrow 100% of your home’s market value, and a portion of your home’s equity will go to paying costs such as mortgage insurance and interest.
How much you can borrow is also based on the following:
- The age of the youngest homeowner, the younger you are, the less you can borrow.
- A good financial assessment to support a reverse mortgage will increase the value you could borrow.
- You can loan more if mortgage rates are low.
- The more your property is worth, the more you can borrow.
What’s a Reverse Mortgage Calculator & How Does It Work?
A reverse mortgage calculator is a financial tool that is used by either your financial adviser or lender to calculate what you can borrow.
Reverse mortgage calculators consider your age and property value; each lender will have a calculator based on its criteria.
There are also online reverse mortgage calculators on our site that you can use to estimate how much you can borrow and what sort of interest rate you could get.
What Are the Current Reverse Mortgage Interest Rates?
The current reverse mortgage interest rates will all depend on your property value and your age.
The interest rates are affected by how long your life expectancy is and if you’ll make any voluntary interest repayments.
Your financial adviser will help you calculate the interest rates you can expect to be offered.
How & When Do I Repay a Reverse Mortgage?
You’ll repay a reverse mortgage when you pass away, move home, sell your house, or permanently move into a care facility.
If you pass on, your heirs can repay the reverse mortgage in full and keep the property, or the home can be sold, and the proceeds used to settle the reverse mortgage.
Your beneficiaries may be able to use the proceeds from your life insurance1 to repay the reverse mortgage and then keep your home.
Who Offers Reverse Mortgages?
Reverse mortgages are offered by banks and other financial institutions specialising in this particular form of later-life lending.
If you’re unsure of who to contact, it’s best to talk to your financial adviser2, who can help you get in touch with a reverse mortgage provider.
How Can I Get a Reverse Mortgage?
You can get a reverse mortgage by contacting a specialist whole of market mortgage broker.
These brokers specialise in scouring the best provider’s products to source you the most favourable deal on a reverse mortgage.
Watch Out for Scams Related to Reverse Mortgages
If you use a provider that’s a member of the Equity Release Council, you’re protected from any scams related to reverse mortgages.
It’s best to avoid any providers who claim to be able to pay you immediately and who aren’t members of the Equity Release Council.
Reverse Mortgage Alternatives
The reverse mortgage alternatives you can consider include:
- Waiting – Don’t take a reverse mortgage while you’re young, do it when you need it in your old age, or you could run out of money.
- Downsizing – Rather, consider moving to a smaller, less expensive home.
- Refinancing – Consider refinancing with a new mortgage that may have more: favourable payments and interest rates.
- Cutting expenses – Cutting expenses where you can is a good way to start saving some money.
Is a Reverse Mortgage Expensive?
Yes, a reverse mortgage is expensive in the long run when you factor in the interest costs.
When Do You Have to Repay a Reverse Mortgage?
You must repay a reverse mortgage if you move, sell your home, move into a care facility or pass away.
Can You Refinance a Reverse Mortgage?
Yes, you can refinance a reverse mortgage if you find you can get more favourable terms.
Can I Sell My House With a Reverse Mortgage?
Yes, you can sell your house with a reverse mortgage if you choose a lender that’s a member of the Equity Release Council3.
How Long Does It Take To Get a Reverse Mortgage?
It usually takes between 4 – 6 weeks to get a reverse mortgage.
Can I Get a Reverse Mortgage With Bad Credit?
Yes, you could still get a reverse mortgage with bad credit, depending on the lender.
Because you don’t undergo an affordability assessment, it’s still possible, but you must let the lender know about your bad credit.
Can You Get Out of a Reverse Mortgage Early?
Yes, you can get out of a reverse mortgage early; however, you may need to pay early repayment charges.
If you have downsizing protection in place, which is offered by all lenders that are members of the equity release council, you can move after 5 years and not pay any penalties.
Can I Buy a Home With a Reverse Mortgage?
Yes, you can buy a home with a reverse mortgage.
Although it’s not common, you can use the equity you release from your main property to purchase a second property if you choose to.
Reverse mortgages are a popular form of equity release for older lenders because you don’t have to make repayments while getting access to the cash tied up in your property.
It’s advisable to make sure you only use a reputable accredited financial adviser, and a lender registered with the equity release council before making any decisions about reverse mortgages.
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