What is a reverse mortgage?
In the simplest terms, a reverse mortgage, often known in the UK as a lifetime mortgage, is a loan against the home you own which can be paid to you in monthly installments or a lump sum, depending upon the terms you and your lender agree upon. The difference between this kind of mortgage and a regular mortgage is that with a reverse mortgage you are not obligated to make any loan payments. Instead, interest on the loan is rolled into the original capital that you’ve borrowed.
That means as time passes, the loan amount increases and equity in your home decreases.
The loan must be paid off either when you die or when you move out of the home—whichever comes first. The full amount owing would also have to be paid off if you defaulted on the loan.
Why would I opt for a reverse mortgage?
Lenders that offer reverse mortgages claim that they are a good way to turn some of the value of your home into cash without having to sell it.1 That money might then be used to make home improvements, pay for unexpected healthcare expenses, take a vacation or supplement retirement income.
How old do I have to be to qualify?
It depends on where you live and the lender you choose to work with (some do have different age restrictions). Generally, in Canada, US and the UK, reverse mortgages are available to homeowners ages 55 and up.
Are reverse mortgages risky?
Like any loan, they can be.
Always make sure you know the terms of the loan contract, and what could cause you to default on the loan and lose your home—because that’s a worst-case scenario you definitely want to avoid.
There are common ways to default (including using the money from your reverse mortgage for illegal activity, letting your home fall into a state of disrepair that lowers its value, and failing to pay home insurance and taxes), but lenders may also have their own definition of defaulting on a reverse mortgage, so make sure you read the fine print to completely understand your responsibilities.
It’s also important to note that because the entire reverse mortgage amount plus interest must be paid off when you die, you will be leaving less money to any beneficiaries you’ve named in your will. They will also have to pay off that amount in a set amount of time, and if the time needed to settle the estate is longer than the allowed time to pay off the mortgage, it could potentially cause financial issues for those left behind.
What should you know before getting a reverse mortgage?
Always do your homework before making any financial decisions that could impact your future and your family’s future. Money Helper recommends you take into consideration the following before thinking about a reverse mortgage:
- Reverse mortgages can be more expensive than an ordinary mortgage for a home. You will typically be charged higher interest rates with a reverse mortgage.
- If you later decide to downsize your property, you may not have enough equity in your home to do this, therefore you may find yourself having to repay some of your mortgage.
- You will have to pay arrangement fees with a reverse mortgage, ranging from £1,500 to £3,000 depending on your plan. You could also be liable to pay early repayment fees if you were to change your mind.
- The money you receive from your reverse mortgage may affect your entitlement to state benefits.
By releasing equity from your home, this could impact money you might need later on during your retirement.
Taking out a reverse mortgage can impact the inheritance you pass down to your family members, as there could be less for them to inherit from you.
In the UK if you’re thinking of taking out an equity release product, you should take financial advice from an Independent Financial Adviser (IFA). If you do opt for equity release, make sure it’s from a provider approved by the Equity Release Council.
Speaking of future planning, Foresters Financial members who want to get their affairs in order can take advantage of LawAssure3, a complimentary online document preparation service. LawAssure lets you access customisable wills, powers of attorney and healthcare directives from the comfort of your own home. Find out more by visiting MyForesters.com.
For more information on reverse mortgages, visit Money Helper.
SOURCES
1,2 https://www.moneyhelper.org.uk/en/homes/buying-a-home/what-is-equity-release
3 LawAssure is provided by Epoq, Inc. Epoq is an independent service provider and is not affiliated with Foresters. LawAssure is not a legal service or legal advice and is not a substitute for legal advice or services of a licensed legal adviser. Foresters Financial, their employees and life insurance representatives, do not provide, on Foresters behalf, legal, estate or tax advice.
Description of member benefits that you may receive assumes you are a Foresters member. Foresters Financial member benefits are non-contractual, subject to benefit specific eligibility requirements, definitions and limitations and may be changed or cancelled without notice.
