Pete Mugleston | Mortgage AdvisorPete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.
Updated: 5th June 2019* | Published: 31st May 2019
We receive lots of requests for more information about reverse mortgages. The main thrust of these enquiries is to clarify what the difference is between a reverse mortgage and a lifetime mortgage. Actually, they both mean the same thing.
In order to further illustrate this point and, hopefully, debunk some of the myths that may surround reverse mortgages we have produced this handy guide which includes everything you need to know about this form of lending.
Once you’ve read through this information, if you feel a reverse mortgage is something which may suit your current requirements, make an enquiry and we will arrange for a reverse mortgage expert to speak with you directly.
A reverse mortgage is a collective term used to describe what is more commonly known in the UK as a lifetime mortgage. As a phrase, it is more typically used internationally in countries such as the USA, Canada and Australia.
Reverse mortgages can attribute their definition by the way they allow interest to roll-up on top of the original capital borrowed and for the total amount to be repaid at an undefined point in the future, as opposed to conventional mortgages where regular payments reduce the outstanding balance over a predetermined period.
Reverse mortgages explained
Reverse mortgages are a form of equity release loan that allows you to unlock a percentage of money tied up within the value of your property. Rather than make regular payments, any interest is rolled-up on top of the amount borrowed with your property acting as security for the loan.
Unlike traditional mortgages there is no pre-agreed term. The original capital borrowed plus all interest accrued is required to be repaid upon death (in the case of joint applicants this would be upon the death of the last surviving applicant) or when you move into a care home.
Are reverse mortgages for pensioners?
Reverse mortgages are aimed at those who are approaching, or may have already reached, retirement and are typically available to anyone aged 55 or over. The money raised can be used for anything you wish; holidays, medical care, family gifts or home improvements.
You can take out a reverse mortgage on either a sole or joint ownership basis. Joint ownership would be typical for married couples and are typically arranged on a ‘last death’ basis where the funds you borrow don’t need to be repaid until the last surviving spouse dies.
How does a reverse mortgage work?
A reverse mortgage allows you to release some of the value held within your main UK residence. There is no requirement for regular repayments as your house is held as security for the mortgage by your lender, with all interest rolled-up during the term and added to your outstanding balance.
As long as you use a lender who is a member of the UK Equity Release Council for your reverse mortgage there is no risk of eviction, repossession or negative equity.
The money you borrow can be released to you in one of two ways:
One tax-free lump sum payment
Most lenders offer a tax-free lump sum option for the full amount you wish to borrow. However, some lenders offer the option to take a smaller lump sum at the outset and then drawdown the remaining funds as and when you need them.
A drawdown facility is particularly useful if you want to use the money from the reverse mortgage in order to top up your retirement income.
What happens with a reverse mortgage when the owner dies?
Unlike traditional mortgages, there is no fixed timescale for a reverse mortgage to be repaid. The life of a reverse mortgage is totally dependant upon one of two key events:
When you die
If you need to move out of your main residence into a long-term care home
In the event of your death or move into a care home, your debt needs to be cleared with any remaining equity from the property sale returned to your estate. For the purpose of a joint reverse mortgage, these events are based on the last surviving applicant’s circumstances.
At this point the lender will look to sell your property to recoup what they are owed. However, there is no definite requirement to sell the property to clear the debt. If sufficient monies exist within your estate to repay what is owed to the lender then this option is available.
Who is eligible for a reverse mortgage?
Reverse mortgages are generally aimed at those who are approaching or who have already reached retirement.
Do I qualify for a reverse mortgage?
We are often asked “at what age can you get a reverse mortgage?” In the UK reverse mortgages are available to anyone over the age of 55 who owns their main residence outright and is resident within the country for at least six months of the year.
For joint applications the age limit of 55 refers to the younger of the two applicants.
Are there any age limits for reverse mortgages?
Generally, lenders do not apply any maximum age at the end of the term, therefore, a reverse mortgage remains open until either the applicant dies (or in the case of a joint reverse mortgage, the last living applicant) or they go into long-term care.
However, some lenders apply a maximum age at the outset and may wish to verify that the applicant is capable of making a decision to borrow money at this stage of their life. Most lenders may apply a maximum age of 85, some will go as high as 95 and a few have no upper age limit.
Can I get a reverse mortgage at age 50 or under?
The general rule with reverse mortgages are that the minimum acceptable age for most lenders is 55. However, this will vary from lender to lender. Some will have a minimum age of 60, a few may have a higher entry age with reverse mortgages for seniors of 62, 65 and older.
How much can I borrow for a reverse mortgage?
For conventional mortgages, the maximum amount you can borrow is governed by each lender’s affordability criteria. With a reverse mortgage, the maximum amount you can borrow will depend on your age, health and the value of your property.
The older you are the more you are able to get, therefore, an applicant who is 78 will be able to borrow more than someone who is 59. Much like with pension annuities, an individual’s perceived mortality will determine how much a lender will allow them to borrow.
How much equity do I need for a reverse mortgage?
Most lenders will expect all existing borrowing to have been cleared before they will agree to a reverse mortgage. The loan to value ratio (LTV) available will differ from lender to lender. Depending upon the age and health of the applicant, most lenders will offer a loan to value (LTV) of 50% and some will offer 55%.
As stated in the previous section, with a reverse mortgage the maximum LTV will be determined by your age, health and the value of your home.
Are there any other key requirements when applying for a reverse mortgage?
All lenders will want to conduct a thorough valuation of your property in order to deem it an appropriate sellable asset at a future date. It’s also possible that an applicant will require a health assessment.
Some lenders may offer enhanced LTVs if an applicant’s life expectancy is reduced due to specific ailments.
What is a reverse mortgage calculator and how does it work?
Reverse mortgage calculators are tools that can be used by either a lender or advisor in order to work out how much equity you may be able to release from your main residence, based on your age and value of the property.
Whilst all lenders will use their own calculator based on their specific in-house requirements, the good news is such tools are not exclusive to mortgage providers.
You can find reverse mortgage calculators on many UK lenders’ or other financial websites but keep in mind that they will only give you a ballpark figure of the amount you could borrow and the rates you’ll qualify for.
For a clearer picture of the reverse mortgage deals available to you, make an enquiry here and the advisors we work with will crunch the numbers with your needs and circumstances in mind.
What are the main advantages and disadvantages of a reverse mortgage?
The main benefit of a reverse mortgage is the ability to access, in some cases, large amounts of money that, previously, were deemed to be tied up within your property whilst retaining ownership of it.
Deciding whether a reverse mortgage could be a good idea or a bad idea really depends on your own personal viewpoint and circumstances when weighing up the pros and cons of these products as well as the potential alternatives on offer:
Reverse mortgage Vs selling your home
The obvious alternative to releasing money from within your main residence would be to sell it and buy a cheaper one as in the example given earlier in this article. However, the need for raising funds may not coincide with a desire to downsize into a smaller home. In this instance a reverse mortgage would suit your needs.
Risks of reverse mortgages
The main disadvantage of reverse mortgages can be the high costs involved and also the potential loss of means-tested benefits. It’s important that you consider how the increase in cash you hold in your bank account affects any benefits you are claiming.
Another clear risk of reverse mortgages would be if the interest builds up over a significant period of time there could be no equity remaining in the property which may have been earmarked for relatives to inherit when you die.
What are the costs involved with a reverse mortgage?
The costs associated with reverse mortgages can vary from lender to lender and may also differ depending upon the level of assistance you require. These costs and fees can include:
Advisor / broker fees
When considering the pros and cons of reverse mortgages a lot of people prefer to consider the advice of an experienced advisor who can outline everything for them. If you make an enquiry we can arrange for a specialist to get in touch and speak with you in more detail.
What are the current interest rates for reverse mortgages?
Whereas interest rates can play a major factor when looking for the best conventional mortgages, trying to compare reverse mortgages interest rates are secondary next to finding a provider with a loan to value (LTV) that fulfils your requirements.
The total amount of interest to be repaid is ultimately based on how long you are going to live, therefore, factors such as whether you want to make voluntary payments or if you’d rather use a drawdown option rather than a lump sum will have an impact on the interest rate you pay.
How do I compare reverse mortgages?
As all rates are subject to change, if you get in touch with us we can ask one of the expert advisors we work with to speak to you and compare the best reverse mortgage interest rate deals currently available.
For more information about how different types of reverse mortgages can affect the interest rate you pay have a look at this article here (link to brief no 0264).
Can I buy a home with a reverse mortgage?
Yes, it’s possible. Traditionally, a reverse mortgage is used to release equity in your home. There are no restrictions on what you can do with those funds once they have been handed over to you.
Buying a house with a reverse mortgage may not seem like an obvious option for using the equity in your main residence but you can definitely use the funds to either fully finance or part finance such a purchase.
Who offers reverse mortgages?
Reverse mortgages are available from banks, building societies and a whole host of providers who specialise in this form of lending. Trying to identify who can offer the best terms that suit your requirements can be tricky - this is where we can help.
If you make an enquiry we can arrange for a reverse mortgage specialist to get in touch and provide more information on who the main lenders are.
How to get a reverse mortgage
The best way to kick-start your reverse mortgage application is by making an enquiry with a whole of market broker, like the ones we work with, That way, you will have access to all of the best deals that you qualify for, as well as bespoke advice.
The advisors we work with have access to the whole market and will introduce you to the best reverse mortgage lenders, based on your needs and circumstances.
Why you should speak to an expert reverse mortgage broker
At Online Mortgage Advisor we can offer you a first-class service tailored to your own specific needs with access to the most experienced brokers available that:
Have access to the whole of market
Have excellent relationships with reverse mortgage lenders
Are OMA accredited advisors
Can offer bespoke advice on reverse mortgages
Have completed a 12 module LIBF accredited training course
Frequently asked questions
Need more information on reverse mortgages? This section answers some of the questions we most frequently hear about reverse mortgages.
Can I sell my house with a reverse mortgage?
Yes you can. If you choose a lender who is a member of the Equity Release Council, one of the rules that must be adhered to is that all reverse mortgages must be portable between properties.
How long does it take to get a reverse mortgage?
Each lender’s timeline and process will differ slightly, however, from the point an application is submitted, through the underwriting and completion a reverse mortgage should usually take between 30-45 days.
Can reverse mortgages be refinanced?
Yes, it’s certainly possible. Most people would look to refinance their reverse mortgage if they feel they can get better terms with either their existing lender or another provider. This may be better interest rates or a higher loan to value (LTV), therefore releasing more equity from their property.
If you’d like to know more about how to transfer your reverse mortgage to another provider, get in touch and we will ask an expert to contact you directly.
Can I get a reverse mortgage with bad credit?
A poor credit record doesn’t usually have an impact upon reverse mortgage applications as there isn’t a requirement to assess affordability for regular payments.
An applicant is still required to declare this information and it may, potentially, impact the interest rate offered by a lender who may request that any outstanding debts are cleared before approval is granted.
Can you get out of a reverse mortgage early?
It is possible, but most lenders will demand a hefty early-repayment charge if you decide you want to pay off the debt before you either die or move into a care home. These charges may be quite prohibitive.
Lenders who are members of the Equity Release Council can offer a special feature known as ‘downsizing protection’. This feature allows you to move into a smaller house after five years and repay your outstanding mortgage debt early. All of this is possible with no early-repayment charges being applied.
Speak to a reverse mortgage expert
If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.
*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA.Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
Read more about Pete here...