Have you heard about reverse mortgages, but don’t know what it means?
With so much confusing terminology in the world of retirement financial planning, if you’re not careful,
You could end up missing out on incredible opportunities.
At SovereignBoss, we’re here to be your guide.
Through this article, we’ll help you discover:
- What’s a reverse mortgage and how it works.
- If a reverse mortgage is different to equity release.
- The types of reverse mortgages available.
We’ve spent countless hours studying the world of retirement care to ensure we’ve left nothing out.
Here’s some of what we found!
What’s a Reverse Mortgage?
A reverse mortgage1 is an accumulative term used to describe what’s more commonly known in the UK as a lifetime mortgage.
It’s generally used internationally in countries such as the USA, Australia, and Canada.
Reverse Mortgages Explained
Reverse mortgages are a form of equity release loan that allows you to unlock the cash tied into your property value, with the home itself as collateral against the loan.
Instead of conventional loans, they allow interest to roll up, where regular payments will reduce the outstanding balance over a set period.
While there’s a pre-agreed term with traditional mortgages, this isn’t the case with a reverse mortgage.
If you die or enter a care home, your original loan plus all accrued interest will be paid.
Are Reverse Mortgages Designed for Pensioners?
Yes, reverse mortgages are designed for older borrowers.
They are generally available for individuals or couples aged 55 or older who require some additional income for retirement,
Or if they want to provide an early inheritance, pay for medical care, go on a dream trip, or renovate their home.
How Does a Reverse Mortgage Work?
You may use a reverse mortgage to pay off the majority of the equity in your primary UK home.
No regular payments are required because your lender holds your house as collateral3 for the loan,
With all interest accumulated throughout the term and added to your outstanding balance.
There’s no danger of eviction, repossession, or negative equity as long as you obtain a reverse mortgage from a lender member of the UK Equity Release Council.
You can release the cash in 2 ways:
- A tax-free lump sum payment – For the entire amount you want to borrow, several lenders provide a tax-free lump sum option
- A drawdown facility – Others let you take a lesser lump sum upfront and then draw down the rest as needed. A drawdown facility is particularly beneficial if you want to use the money from your reverse mortgage to boost your retirement income.
What Happens With a Reverse Mortgage When the Owner Dies?
When a homeowner with a reverse mortgage dies, the home is usually sold and the lender is repaid the loan plus accrued interest.
A reverse mortgage is not subject to the same time constraints as a traditional loan.
There is no firm timetable for repaying a reverse mortgage because it is not based on a set duration.
The life of a reverse mortgage is entirely reliant on one of two major occurrences:
- When you die – Equity from the property sale is used to repay your debts.
- You enter a long-term care home – The process is the same as when you die.
At this point, the lender will try to sell your property to repay what they are owed.
There is no need to sell the home to settle the debt, however.
You may opt for this alternative if enough money remains in your estate after paying off the debt.
Who Is Eligible for a Reverse Mortgage?
Those who are eligible for a reverse mortgage are usually retired or close to reaching retirement age.
Do I Qualify for a Reverse Mortgage?
You might qualify for a reverse mortgage:
If you are aged 55 or older, own your home in the UK, or have a small mortgage left, and the property is your main residence that you reside in for at least 6 months per year.
If you opt for a joint application, the youngest homeowner must be 55.
Are There Any Age Limits for Reverse Mortgages?
The age limits for reverse mortgages will be lender-specific. Some reverse mortgage lenders have no age limits, whereas others will set a maximum age of between 85 and 95.
Can I Get a Reverse Mortgage at Age 50 or Under?
No, you will not qualify for a reverse mortgage if you are age 50. The minimum age is 55 and some lenders only have plans available if you are 60 or 65.
How Much Equity Can I Borrow with a Reverse Mortgage?
The amount of equity that you can borrow with a reverse mortgage depends on your age, your property value, and the condition of your health.
Unlike with traditional mortgages, you won’t need to undergo affordability checks as there are no monthly repayments required.
How Much Equity Do I Need In My Home for a Reverse Mortgage?
To qualify for a reverse mortgage, you need to have a maximum amount of equity in your home, with a small or no mortgage left.
The loan-to-value (LTV) achievable is usually up to 50% or 60%, but this will be lender-dependent.
If you have a mortgage remaining, you’ll need to use some of the cash you unlock to settle the balance.
Are There Additional Requirements When Applying for a Reverse Mortgage?
When applying for a reverse mortgage, there are no major additional requirements.
If you have a lifestyle or medical condition, you will need to fill out a medical assessment.
Furthermore, the lender will perform a detailed valuation of your property.
What Is a Reverse Mortgage Calculator & How Does It Work?
A reverse mortgage calculator is a tool used by financial advisers and lenders to determine the maximum amount of money that a client can unlock from their home,
Based on their personal circumstances and property value.
While lenders may have in-house specifications and your final calculation will be based on a detailed valuation, you can get an accurate estimate by using our FREE equity release calculator.
What are the Main Pros & Cons of a Reverse Mortage?
The main benefit of a reverse mortgage is that it gives older homeowners the opportunity to access tax-free cash, sometimes even large quantities, while still living in your property.
The main disadvantage of a reverse mortgage is that the interest can compound quickly, reducing the amount of equity tied into your property.
Is it Better to Select a Reverse Mortgage or to Sell my Home?
From a financial point of view, it is usually better to sell your home and downsize than to opt for a reverse mortgage.
The reason for this is that if you sell your home, you will benefit from the full sale value, instead of the portion you will get with a reverse mortgage.
However, a reverse mortgage is a better option if you need money, but really don’t want to move out of your beloved family home.
What are the Risks of a Reverse Mortgage?
The risks of a reverse mortgage is that it will use up all the money in your home, leaving little or no inheritance for your heirs.
Luckily, the no negative equity guarantee means that you will never owe more than the final sale value of your home.
Furthermore, you can apply an inheritance protection to keep aside a portion of your estate for your beneficiaries.
Another risk is that it will likely impact your qualification for means-tested benefits.4
What Are the Costs Involved in Selecting a Reverse Mortgage?
The costs involved with a reverse mortgage include advice fees for a financial adviser, legal costs for a solicitor, a property valuation, arrangement fees, and completion fees.
Some lenders offer a free valuation and/or wave the completion fee.
What Are the Current Reverse Mortgage Interest Rates?
The current reverse mortgage interest rates start at 3.1%, with the average interest rate being just below 5%.
The maximum interest rates with a reverse mortgage are around 6.8%.
The amount of interest you will pay is determined by your age, your property value, and the condition of your health.
How Do I Compare Reverse Mortgages?
The best way to compare reverse mortgage options is to get in touch with a whole market financial adviser who will talk you through all your options,
Looking at plans provided across the industry.
They will compare interest rates and deals to help you find the best product for you and your family.
Can I Buy a Home with a Reverse Mortgage?
Yes, you can technically buy a home with a reverse mortgage.
However, the home from which you unlock cash must remain your primary residence.
Generally speaking, you can use the money that you unlock with a reverse mortgage in any way you wish to.
Who Offers Reverse Mortgages?
Reverse mortgages are usually offered by banks, building societies, or lenders that specifically focus on retirement or these types of products.
How to Get a Reverse Mortgage
You can start the process of getting a reverse mortgage by speaking to an experienced financial adviser or broker who focuses of later-life lending.
Here’s some tips on how to select the right individual or firm:
- They must have access to the whole market.
- They must have a good industry reputation and the right connections.
- They should be an OMA accredited advisor.
- They specialise specifically in reverse mortgages.
- They have completed the appropriate accreditations.
Will I Pay Property Taxes with a Reverse Mortgage?
Yes, you will continue to pay property tax with a reverse mortgage.
A reverse mortgage has no impact on the property taxes you claim.
You will continue to pay property taxes and they will be treated in the same manner as previously.
Reverse mortgage in the UK is a synonym of lifetime mortgage, but the term is not widely used.
Therefore, if you do want more information, you must do your research on lifetime mortgage lenders.
Additionally, get in touch with a whole market financial adviser who can aid you in finding the best option for you and your family.