What’s a Reverse Mortgage & How Does it Work?

Discover How You Can Fund Your Retirement With a Reverse Mortgage Loan
Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui
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What’s a Reverse Mortgage & How Does It Work?

Have you heard the term ‘reverse mortgage’, but have no idea what it means?

Alternatively, have you recently moved to the UK, and you’re wondering if reverse mortgages exist here?

Well, the great news is they do, but there’s some vital information you need to be aware of.

Otherwise, you could end up missing out on an incredible financial opportunity.

Luckily, EveryInvestor is here to be your trusted guide.

This article will help you discover:

  • The definition of a reverse mortgage.
  • What happens to a reverse mortgage when the homeowner dies.
  • If there are any age limits with reverse mortgages.

As a team that believes in continuous growth, we’re constantly reviewing the latest industry updates to ensure that every later-life lending topic is covered.

Therefore, we recognise the importance of engaging with the term ‘reverse mortgage’. 

Here’s what we’ve discovered!

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What Is a Reverse Mortgage?

A reverse mortgage is an umbrella term for products that are more commonly known as lifetime mortgages in the UK.

The name says it all. Instead of paying off a monthly mortgage, you access the money tied into your home. 

What’s excellent about these products is that there’s zero expectation to repay any of the loan amount or interest in your lifetime.

Instead, you can opt to make payments towards the interest and a percentage of the equity (up to 40% annually, lender dependent), and stop and start whenever you wish. 

What’s great about reverse mortgages is they can be unlocked by individuals or couples.

If you live with a partner or spouse, a joint plan may be something you want to consider.

This way, both of you can remain home until you pass away or go to long-term care.

Alternatively, you can go for an individual plan, but you must ensure that both partners have further plans for accommodation once they’ve lost their partner. 

If you opt for no repayments on a reverse mortgage loan,

The interest will compound and the total loan amount will be settled when you pass away or move to long-term care, usually from the property sale.

Are Reverse Mortgages for Pensioners?

Yes, reverse mortgages are for pensioners, but not only for those over 65’s.

Homeowners aged 55 and older may qualify for a reverse mortgage loan in the UK.

Therefore, whether you’re a pensioner or still planning your retirement, a reverse mortgage could be for you. 

How Does a Reverse Mortgage Work?

A reverse mortgage is designed as a secured loan, and your property will serve as collateral. Once the homeowner unlocks equity, they have 3 options:

  • Repay the monthly interest, and between 10% and 40% of the annual loan amount. 
  • Make partial repayments whenever you have the means to do so. 
  • Allow the interest to compound.

Any outstanding reverse mortgage loan amount will be repaid when the last remaining homeowner passes away or relocates to long-term care. 

What Happens with a Reverse Mortgage When the Owner Dies?

When the owner of the property with a reverse mortgage passes away, it’s usually sold and the income is used to cover the loan and any compound interest that’s accumulated.

If the homeowner pays off some of the loan and interest in their lifetime, then the sale will only need to cover what’s left.

Any additional equity will go to the homeowners’ estate and be distributed to beneficiaries, or according to their heirs. 

As previously mentioned, if there’s more than one homeowner and one passes away, the other can only stay in the home if they’ve unlocked a joint plan. 

If you want to keep your parent’s property once they’ve passed on, you can use alternative means to pay back the reverse mortgage loan.

Should you wish to plan ahead in this regard, ask your loved ones to talk through these options with their financial adviser before unlocking a reverse mortgage plan. 

Who Is Eligible for a Reverse Mortgage?

Reverse mortgages in the UK are designed for homeowners older than 55. You may be eligible for one of these loans if your property value is more than £70,000.

Furthermore, it must be located on the mainland in the UK, or most surrounding islands.

Islanders could have fewer options, so it’s ideal to review the top reverse mortgage companies on the market to find the best lenders available in your area. 

Various lenders may have additional criteria, but your financial adviser will help you find a reverse mortgage plan to suit your needs. 

Do I Qualify for a Reverse Mortgage?

You’ll qualify for a reverse mortgage if you fit the above criteria and if the home you stay in is your primary residence.

One of the major qualification criteria is that you must live on the property for at least 6 months a year.

For the rest of the time, you can live anywhere you wish, even using a reverse mortgage to purchase a second home locally or internationally. 

In addition, you can qualify for a reverse mortgage and have lodgers.

So, if your extra rooms are on Airbnb or you are a member of the Rent-a-Room scheme, you can still retain this income.

Additionally, you can choose these options at any time you wish. 

Rent-a-room is fantastic as you can make up to £7,500 in annual income and have company from the guests you entertain.

Are There Any Age Limits for Reverse Mortgages?

Some reverse mortgage lenders have no age limits, whereas others do.

If there are age limits, it would be between 85 and 95 years old.

However, once you’ve unlocked a reverse mortgage, the plan is available for life and you can live on the property forever.

That being said, you do have the opportunity to pay off the loan in your lifetime, should you have the means or wish to do so. 

Reverse Mortgage Pros & Cons

Like all financial products, reverse mortgages have some amazing features, but also have some pitfalls that homeowners must be aware of.

These pros and cons will help you determine if equity release is a good idea:

Reverse Mortgage Advantages

  • You can unlock tax-free cash.
  • You can stay on your property for the rest of your life. 
  • The money can be used in any way you wish. 
  • The industry is regulated and plans are safe. 
  • You can pay back some of the loan and interest, but payments aren’t essential.

Reverse Mortgage Disadvantages

  • You’ll reduce your inheritance. 
  • You can’t take any additional loans against your property. 
  • The interest can compound quickly if you don’t make monthly payments. 
  • It will impact your eligibility for means-tested benefits.
  • If you end your plan early, you may incur early repayment charges.

Got Questions? Check These Out

Is a Reverse Mortgage a Type of Equity Release?

Is There a Difference Between a Lifetime Mortgage and a Reverse Mortgage?

Are Reverse Mortgages Regulated by the Equity Release Council?

In Conclusion

Reverse mortgages, more commonly known in the UK as lifetime mortgages, are a fantastic financial product with a range of benefits for older homeowners.

They can provide tax-free cash to spend as you wish, and no repayments are needed in your lifetime. 

However, it’s important to note that reverse mortgages do have some pitfalls, so you must consult a specialist financial adviser who can talk you through all your options, including reverse mortgage alternatives.

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