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Reverse Mortgages

Heard of reverse mortgages in the UK but need to figure out how they work? This complete guide will ensure you’re an expert on the topic by the time you’re done reading it.
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When we talk about equity-release mortgages, there’s often a bit of confusion between a lifetime mortgage and a reverse mortgage.

Both are equity-release mortgages, and the difference between them is more in terms of convention than anything else. What we call a lifetime mortgage in the UK is a reverse mortgage in most other English-speaking countries. 

Today, we’ll look at what this type of mortgage is, its advantages and disadvantages, and whether it’s the right one for your needs.

What Is A Reverse Mortgage?

In a traditional or ‘forward’ mortgage, money is borrowed to buy a home or property. In contrast, reverse mortgages are for elderly citizens who want to free up some of the locked equity in their homes.

In this type of mortgage, there’s no agreed-upon, pre-fixed term during which you must repay the loan. Usually, there are no monthly repayments either, as interest is accumulated and added to the capital when it’s repaid.

But when do you need to repay the loan? Well, in this type of loan, whenever the borrower passes away or goes into long-term care, the property is sold, and the loan is settled from the sale amount.

There’s also a variation of the reverse mortgage called a ‘flexible’ reverse mortgage. 

Here, you have the option to repay the interest every month. This type of reverse mortgage is used by borrowers who are still on the younger side of life and have a steady income stream to reduce the amount of interest accumulation.

With a flexible reverse mortgage, you can ensure that the interest amount is paid off and doesn’t compound. This way, at the end of the payment period, you just have to repay the initial borrowed amount.

How Does A Reverse Mortgage Work?

How Does A Reverse Mortgage Work

Before taking a reverse mortgage, it’s important to understand the working principle behind reverse mortgages.

These types of mortgages are less reliant on credit checks and affordability assessments that are usually associated with standard mortgages.

The reason is that in this case, your home is the mortgage security. 

You can only take out a reverse mortgage (or lifetime mortgage) if you own the home and it’s your primary residence in the UK. Also, you need to prove that you live in the UK for at least 6 months a year alongside other lending criteria.

With a reverse mortgage, there are two ways to access the money you’re borrowing. 

The first one is taking a lump sum, which is the preferred option of most people. This can be helpful when you’re renovating the property or need the cash for some other emergency expense.

The other method is called Drawdown, and it allows you to take a part of the amount borrowed and access the remaining as and when you need it. 

This way, you only have to pay interest on the amount you’re actually withdrawing and not on the entire amount that has been sanctioned.

What Is The Minimum Age For Reverse (Lifetime) Mortgages?

Usually, the minimum age to get a reverse mortgage is 55, though some lenders often set a higher age bar.

There can also be a maximum age for taking out a reverse mortgage, which is usually anywhere between 85 and 95 years. This, of course, depends on the lender’s policies.

Some even put a minimum value of around £70,000–£75,000 on the property for it to be eligible for a reverse mortgage.

Maximum Amount That Can Be Borrowed With A Reverse (Lifetime) Mortgage

The maximum amount that you can borrow in a reverse mortgage agreement depends on a few factors, such as your age, health, and the value of your home. Usually, the older you are and the lower your life expectancy, the more you can borrow. 

As for the percentage of equity against your home that you can take out, most buyers put a cap at 70% as a very maximum. 

As part of your application process, the lender will assign a valuer to assess the property before agreeing the loan.

Advantages And Disadvantages Of A Reverse (Lifetime) Mortgage

Advantages

  • Allows access to property equity without selling it outright
  • The amount received as a loan is tax-free
  • No restrictions on what you can use the money for
  • No (or optional) monthly payment requirement
  • Doesn’t stop you from moving
  • Lets you protect part of your home through inheritance protection
  • Potential No negative equity guarantees

Disadvantages

  • Cumulative interest can add up very fast to vast amounts
  • You might not be able to avail of existing means-tested benefits
  • In case you gift the borrowed equity, the receiver might have to pay an inheritance tax
  • Higher interest rates as compared to traditional forward mortgages
  • Associated fees and legal costs  

What Happens In Case Of A Joint Reverse Mortgage?

If you and your partner take a joint reverse mortgage, then when one of you passes on, the mortgage will remain in effect. 

It’s only when all associated partners have passed away or moved into long-term care facilities that the house is sold and the loan repaid.

Property Types Eligible For Reverse Mortgages

As mentioned previously, for any property to be eligible for a reverse mortgage, it must be valued at around £70,000 or more in most cases. 

Lenders can also have other criteria regarding location, property condition, and type of construction.

The following are some of the property types that may be ineligible for reverse mortgages:

  • Thatched roof properties
  • Properties with non-standard construction
  • Properties that are a part of shared ownership, partial exchange, or right-to-buy schemes
  • Properties with renewable energy
  • Properties situated in conservation areas
  • Properties on agricultural land
  • Listed Properties
  • Commercial properties

Who Should Avoid Getting A Reverse Mortgage?

The following groups of people should potentially avoid reverse mortgages:

  • Those who are uncomfortable with compounding interests
  • Who want to leave their home to their heirs
  • Those who might want to downsize
  • If you possess significant other assets and liquid savings
  • If you qualify for means-tested benefits

Since reverse mortgages aren’t the best choice for everyone, it’s essential to get professional advice in this matter before looking at options by an adviser who holds the appropriate equity release qualification with the financial conduct authority.

Frequently Asked Questions (FAQs)

1. Is it possible to exit a reverse mortgage early?

Yes, it is. You just have to pay back the entire loan amount due at the point you’re exiting (capital + interest) either by selling your home or by using up any of your other assets. 

Some reverse mortgage agreements even actually include provisions for early payment, without any prepayment penalty. 

2. Who are some of the lenders offering reverse mortgages in the UK?

Some well-known lenders offering reverse mortgages in the UK are:

  • Hodge Lifetime
  • Aviva
  • OneFamily
  • Pure Retirement
  • Legal & General
  • More2Life

3. What are some of the alternatives to reverse mortgages?

Some popular alternatives to reverse mortgages include:

  • Refinancing
  • Downsizing
  • Borrowing from friends or family
  • Interest-only mortgages such as retirement interest only mortgages. 

4. Can you get a reverse mortgage with a poor credit history?

Yes, you can. Since reverse mortgages depend primarily on the property as your loan guarantee and may not require any monthly prepayments, you don’t need to pass any stringent affordability assessment or credit check to get one with a lot of providers. 

Please bear in mind advice on equity release can only be given by those who hold the relevant equity release qualification with the financial conduct authority. 

George Rogers LendingLine
CeMAP & CERER Qualified Mortgage Adviser

I am CeMAP & CERER qualified mortgage adviser and have helped a number of clients realise their dreams when they thought it would not be possible. I’m skilled at getting mortgages sorted for people with a history of missed payments, CCJs, defaults, debt management programmes, IVAs and bankruptcies.

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Heard of reverse mortgages in the UK but need to figure out how they work? This complete guide will ensure you’re an expert on the topic by the time you’re done reading it.
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