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 is 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.
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 for Pensioners?
Reverse mortgages are designed for people who are approaching or have already reached retirement2 age and can be taken out by anyone over the age of 55. The funds can be spent on anything you want, including holidays, medical expenses, family presents, or house improvements.
A reverse mortgage may be taken out on either a single or joint basis. Joint ownership is most often used for married couples, and the money you borrow does not have to be repaid until the last surviving spouse passes away.
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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?
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.
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Who Is Eligible for a Reverse Mortgage?
Reverse mortgages are generally designed for those who are retired or heading that way. However, there are certain criteria.
Do I Qualify for a Reverse Mortgage? – You need to be aged 55 or older.
Are There Any Age Limits for Reverse Mortgages? – This depends on the lender. Some will cap opportunities to 85 or 95 years of age.
Can I Get a Reverse Mortgage at Age 50 or Under? – You won’t have the opportunity to get a reverse mortgage when you’re 50. You’ll need to wait until the youngest homeowner is 55.
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.
Wondering how much equity you could unlock? Try out our FREE equity release calculator for an accurate estimate.