What are reverse mortgages?
Reverse mortgages are a general term used to describe the lifetime mortgage in the UK. Reverse mortgages are mortgages made specifically for older borrowers which allows them to roll up all the interest in their mortgage on top of the capital they have borrowed on their mortgage and pay this back in the future. This is usually when they have died or moved into a care home.
The term reverse mortgages is attributed towards the fact that with normal mortgages the monthly mortgage repayments will have reduced the capital owed and the total interest owed over the mortgage term whilst in the case of a reverse mortgage it builds up for an unknown amount of time before it is repaid.
Reverse mortgages are essentially a type of equity release mortgage that allow you to release the equity in your home in return for one large sum or regular payments.
You may also be able to take random payments out too.
Your choice of money withdrawal from your reverse mortgage may have tax implications and it is important that you fully understand what these implications may be before choosing your form of withdrawal for you reverse mortgage.
Where can I get a reverse mortgage?
Reverse mortgages are available from banks, building societies and other specialist providers.
Reverse mortgages vs Equity mortgages?
Reverse morrgages (aka Lifetime mortgages) are a form of equity release.
The reverse mortgage is given based on the equity in your home which you choose to release and for that reason the reverse mortgage is secured on your home.
This means the reverse mortgage lender may benefit if house prices rise and may suffer if house prices fall. Of Course if house prices rise then you may feel as if you have lost out as you could have sold the equity in your home for more but if house prices fall this may seem like a win for you.
With reverse mortgages there is no mortgage term so the mortgage is essentially undefined and will continue for as long as you are alive or as long as you haven’t moved out of your house into a care home.
If you get a reverse mortgages as a joint mortgage applicant then the reverse mortgage will only be repaid when the last surviving applicant dies or moves into a care home.
How does a reverse mortgage work?
Reverse mortgages essentially allow you to release the equity you have in your home. The home will have to be your main UK residence and not an investment property or second property.
When you get a reverse mortgage (aka lifetime mortgages) there will be no need to make monthly mortgage repayments as reverse mortgages do not work like this.
Reverse mortgages roll up all the interest you may have to repay and this is repaid at the end of the reverse mortgage term along side the capital borrowed. This is only paid when you move out of the home into a care home or die.
If you are joint borrowers then it will be when the last surviving borrower moves out of the care home or dies.
The reverse mortgage lender will be repaid by selling your house and then leaving whatever is left to your estate.
Most reverse mortgage lenders are now part of the UK Equity Release Council.
This means they pledge that you will never have a negative equity release mortgage and there is no risk of being evicted or having your house repossessed
When you take out a reverse mortgage you will be able to take out your money by either
- One tax-free lump sum payment
- Drawdown facility
You will be able to get either of these options with most reverse mortgage lenders.
This means you have the flexibility to choose which way you want your money.
How is a reverse mortgage repaid?
When you die or move into a care home the reverse mortgage will be repaid.
As mentioned before, reverse mortgages don’t have monthly mortgage repayments so they are repaid at the end of the mortgage term.
Once either of the events above occur then eht reverse mortgage lender will usually look to sell the property and recoup the reverse mortgage.
This isn’t the only option. In some cases the reverse mortgage lender could simply be repaid through the funds that the borrowers estate possess.
This is possible if the family want to continue living in the house.
What are the costs of a reverse mortgage?
Different reverse mortgage lenders may have different costs associated with taking out a reverse mortgage.
Typically the costs included in getting a reverse mortgage include:
- Advisor / broker fees
- Legal costs
- Property valuation
- Arrangement fees
- Completion fees
Can you get a reverse mortgage with bad credit?
A bad credit may or may not have an impact on your ability to get a reverse mortgage. Usually it won’t as you don’t have to make monthly mortgage repayments.
Most reverse mortgage lenders will require you to clear any outstanding debts before they offer you a reverse mortgage.
Bad credit could include:
A debt management plan
A home reposession
What are the current interest rates for reverse mortgages?
Interest rates on reverse mortgages will be based on a whole host of circumstances.
The total amount of interest you will pay will be based on how long you live or live in the home. So in some way you have some control over the interest you are charged.
The interest charged on a reverse mortgage may usually be based on the loan to value the reverse mortgage lender gives you.
Who is eligible for a reverse mortgage?
To be eligible for a reverse mortgage you will usually have to be over 55 and you may have to be retired already. For joint applicants both applicants will have to be at least 55 years old.
Some mortgage lenders may have a maximum age limit at which they may not accept a reverse mortgage from borrowers. For some this could be 85 and then for others it could be 95. Different reverse mortgage lenders will have different borrowing limits and you may check with your mortgage broker before you choose a reverse mortgage lender.
Whilst most reverse mortgage lenders may have a minimum age of 55, some may have a higher age limit such as 60 or 65. You may want to check with your mortgage broker before deciding on which reverse mortgage lender to go with.
There are no restrictions on what you can use the funds generated from your reverse mortgage for. You can use it for holidays, home improvements, a mortgage deposit for a family member or friend etc
Reverse mortgages can be taken out by just one borrower or as a joint mortgage where there can be more than one borrower.
When you take a reverse mortgage out as joint borrowers then it will only need to be repaid when the last person on the joint reverse mortgage dies or moves into a care home.
You will have to own your main residence outright and this will be the residence on which the reverse mortgage will be issued on.
You will also have to be a resident in the UK for at least six months every year.
Before providing you with a reverse mortgage. The reverse mortgage lender will undertake a valuation of your home to ensure they will be able to sell it to recoup their finds when the mortgage comes to an end.
How much can you borrow with a reverse mortgage?
For ordinary mortgages the mortgage lender may work out how much they may be able to lend you based on an income multiple or based on their eligibility criteria but with a reverse mortgage, the maximum amount you can borrow will depend on your age, health and the value of your property.
Reverse mortgage lenders may be able to work out how much they can lend you based on your age. This may be the most significant factor and you may find more reverse mortgage lenders willing to lend you more if you are older.
How long does it take to get a reverse mortgage?
There isn’t a fixed timeline as most reverse mortgage lenders will all work differently and at a different timeline.
It may take up to 1 month for the whole reverse mortgage process to be finalised.
How much equity do you need for a reverse mortgage?
Most reverse mortgage lenders will expect you to have no first charge mortgage on your property if not they may not lend to you.
How much a reverse mortgage lender may be able to lend you will depend on their internal or external lending criteria.
Some reverse mortgage lenders may offer you a 45% loan to value and others may offer you significantly more.
Reverse mortgage lenders may use your age and health to determine what they want to lend to you.
Some reverse mortgage lenders will lend more to you the more likely it seems you will die soon.
You may want to inquire with a mortgage broker before deciding which reverse mortgage lender suits your needs.
What are the pros and cons of a reverse mortgage?
As with anything out there there will be some pros and cons. A reverse mortgage has the same pros and cons.
Most people will say that rather than have to pay so much interest on your home you could simply sell your home and buy a cheaper one. You will have released the equity in your home without having to pay any interest.
Others will say, “but what if I want to live in my home?”
So, in some way reverse mortgages offer some flexibility and guarantee.
What is the down side of a reverse mortgage?
Reverse mortgages have high application costs and some may find the interest being charged very high.
Reverse mortgages may also cause you to lose any benefits you may currently be eligible for due to increased income you may now have.
Reverse mortgages may also cause you to lose all the equity in your home and the whole home will end up being owned by the mortgage lender. This will mean you have nothing to leave to your family in your will.
Can I buy a home with a reverse mortgage?
You can use the funds obtained from your reverse mortgage to do anything you like.
This means you can use it to buy a home after getting the funds from your reverse mortgage.
How to get a reverse mortgage
To get a reverse mortgage, simply contact a mortgage broker and make an initial inquiry.
Can you sell your house with a reverse mortgage?
If the lender is part of the Uk equity council then your reverse mortgage will likely be portable and this means you can sell your house and move your reverse mortgage to another property.
Can a reverse mortgage be refinanced?
Yes, you may be able to refinance your reverse mortgage if you find a reverse mortgage lender who can offer you better terms. This could be an increased borrowing through a better loan to value or simply a lower interest rate charge.
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.
Is a reverse mortgage ever a good idea?
A reverse mortgage could be a good idea if you want access to capital and the only option you have is the equity in your home. Whether it is a good idea or not for you will depend on your particular circumstances.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.