Reverse Mortgages

In the mortgage industry, confusion can sometimes arise between the terms ‘reverse mortgage’ and ‘lifetime mortgage’. They are both types of equity release, but what sets them apart?

Well, in the UK, we tend to use the term ‘lifetime mortgage’ while in other English-speaking countries, ‘reverse mortgage’ is more common.

In this article we’ll look at what a reverse mortgage is, the advantages and disadvantages of this type of borrowing and how to decide whether it’s the right step for you.

What is a reverse mortgage?

Whereas with a traditional or ‘forward’ mortgage, you borrow money to buy a home, reverse mortgages are for those in later life who own their home and want to release some of the equity locked up in it.

There is no pre-agreed term, and the loan is repaid when you pass away, move into long term care or sell the house.

Typically, there are no monthly repayments. Instead, interest is rolled up and added to the initial capital when you settle the loan.

Flexible reverse mortgages

A flexible reverse mortgage is one that includes the option to make monthly repayments. Flexible reverse mortgages are often used by homeowners who are still working or are relatively young and want to release equity but protect their children’s inheritance.

If you take out a flexible lifetime mortgage and repay all the interest every month, the balance of your account won’t increase, and you will only need to pay back the initial amount borrowed when the time comes to pay off the loan.

How do these mortgages work?

Reverse mortgages don’t require the usual affordability assessment and credit checks associated with a standard mortgage application. This is because your home is the security for the loan.

Usually, they can only be taken out if you own the property outright and it is your main UK residence. In most cases, you can take out a lifetime mortgage provided you live in the UK for at least six months of the year.

There are two main methods of accessing the equity you borrow:

How old do you need to be?

Typically, you need to be at least 55 to take out a reverse mortgage. However, some lenders set a higher minimum age.

There are also lenders who have a maximum age cap at the time of taking out the loan. Most who include this cap it at 85 but some go up to 95. Due to the nature of this type of borrowing, there is no upper age limit on the end of the loan.

How much can you borrow?

The maximum amount you can borrow will depend on several factors including:

• Your age: Generally, the older you are the more you can borrow.
• Your life expectancy: Borrowers with a lower life expectancy can often borrow more.
• The value of your home: There is no set percentage of equity that can be released. Depending on circumstances, it can be as low as 8% or as much as 70%. The lender will instruct an independent valuer to assess the property as part of the application process.

Use our calculator below to get a rough idea about the amount of equity you could release.

How a broker can help you find the right reverse mortgage

Taking out a reverse mortgage can allow you to benefit from the equity you have built up over the years without being forced to sell your family home.

But it’s a big decision as it will affect the value of your estate and, therefore, the inheritance you leave behind. So, while it is the right decision for some homeowners, for others there are other alternatives that are better suited to their situation.

The best way to assess all the options, make sure you fully understand the terms and conditions of the loan and get the best deal if you decide to go ahead, is to speak to an advisor who deals with reverse mortgages on a daily basis and understands the market.

All the reverse mortgage brokers we work are members of the UK Equity Release Council so you can rest assured you’re getting the best advice. To arrange a chat with an expert, get in touch.

Advantages and disadvantages of reverse mortgages

As with all types of borrowing, there are advantages and disadvantages to lifetime mortgages:

Advantages

The first and most obvious benefit of a reverse mortgage is that it allows you to access equity from your property without having to sell it.

Disadvantages

The biggest drawback of a reverse mortgage is that it can be very costly. If you live for a long time after taking out the loan, the interest can have a significant impact on the value of your estate.

Which lenders offer them?

There are lots of lenders that offer lifetime/reverse mortgages, including high street names and specialist lenders. Each has their own criteria in terms of maximum loan to value (LTV), early repayment charges (ERC) and age caps.

Rates can vary significantly but choosing a product with the terms and conditions to match your situation is more important than any headline rate.

The table below gives an indication of the type of terms currently available.

The rates quoted above were correct at the time of writing and are subject to change at any time at the lender’s discretion. Speaking to a mortgage broker is the best way to keep track of the rates available at any given time.

What happens when you die?

If the mortgage is in joint names, when one partner dies the mortgage remains unaffected. When the last surviving borrower passes away or moves into long term care, the house is usually sold, with the initial capital and any rolled up interest repaid using the proceeds.

If those inheriting your estate want to keep the house, they can do so by paying off the reverse mortgage using other means.

How to get out of a reverse mortgage

If you find yourself in a position where you feel a reverse mortgage isn’t the right solution for you, there are a number of ways you could get out of one, rather than wait for the traditional exit (as outlined in the section above).

You could: