Most homeowners and purchasers of property are familiar with the concept of a mortgage. Simply put, a mortgage is the way in which a bank / lender takes security for the money that they lend to the borrower (most commonly so the borrower can purchase their home) and a “mortgage” is secured over the property. Regular mortgage repayments are made towards the mortgage to reduce the borrowing. Anyone who meets the bank/lender’s criteria, can obtain a mortgage.
But, what about a reverse mortgage (also known as a reverse equity mortgage)?
A reverse mortgage allows you to borrow from the equity (the value) in your home without needing to make regular mortgage repayments. This allows homeowners who are asset rich, but have no ‘cash at hand’, access to some of the house’s equity. Repayments are not required until the maturity date, which is one of its key features. The loan amount accumulates compounding interest (the loan increases the longer it remains unpaid).
Reverse mortgages are generally offered to those who are aged 60 or over depending on each Bank’s minimum age requirements. Normally, the home must not have any other charges/mortgages, the borrower must have capacity and also be independently legally advised before entering into a reverse mortgage. Due to the age and stage of the borrowers and the nature of a reverse mortgage, the lender needs to ensure the borrower has clear explanations as to costs (as well as advice) before entering into this arrangement.
A reverse mortgage is good for some people but there are pros, cons and considerations.
We’ve highlighted some of these below:
Pros
- No repayments until maturity which is normally on either:
- the sale of the home;
- the death of the borrower;
- the borrower permanently vacating the property (i.e., to a retirement / care home);
- The reverse mortgage allows the borrower to access surplus funds without selling and moving from their home i.e., to purchase a motor home, or pay for travel or other expenses;
- Generally, the Bank will guarantee that the borrower’s loan will not be more than the house’s value i.e., that the borrower will not have to repay more than the home’s value.
Cons/considerations
- A reverse mortgage is not as simple as a standard mortgage and clear, independent legal advice is required;
- Generally, there is a maximum number of borrowers the bank will allow (i.e., up to 2 people);
- Banks will have criteria on the type of property they will lend on for example, the house would normally need to be a residential house in a good state of repair;
- Consideration should be given to how a reverse mortgage will affect the distributions under your Will (as there may be not enough in your estate to make the distributions that you have set out) once the reverse mortgage is paid;
- It is recommended that family members are consulted prior to entering into a reverse mortgage arrangement;
- Due consideration should be given to other alternatives i.e. can the house be sold, can family provide assistance with funds, can you utilise other investments/savings before opting for a reverse mortgage;
- The bank will normally only allow you to borrow a certain percentage of the home’s equity;
- Consideration should be given to how the equity of the home would be affected in the event that you needed to sell (i.e., you needed or wanted to move due to change in circumstances) would there be enough funds leftover;
- Making sure that as the borrower, you can maintain and insure your home and keep up rates payments and outgoings that are required under a reverse mortgage agreement is also very important.