If you’re a recent retiree, you might be feeling the effects of your reduced monthly earnings and are looking for alternative ways to free up income. If you’re a homeowner, or own a significant amount of home equity, you could be eligible for a reverse mortgage.
Reverse mortgages allow you to borrow against the value of your home in order to free up equity, helping you pay your monthly bills and outgoings.
In this article, we’ll cover everything you need to know about reverse mortgages, including the many benefits.
What is a reverse mortgage?
A reverse mortgage is a type of loan as it allows the homeowner to borrow money. However, it isn’t the same as a typical mortgage. Instead, borrowers with significant home equity can borrow against the value of their property, and they aren’t required to make monthly repayments.
How do reverse mortgages work?
Reverse mortgages only become payable when the homeowner dies, moves out, or sells the property. Lenders are obligated to only provide a loan that doesn’t exceed the home’s value, and if the house value drops, the borrower won’t be responsible for paying the difference.
After a reverse mortgage is approved, borrowers can choose to receive their loan through different options, including:
- A lump sum
- A fixed monthly payment for a set period
- A fixed monthly payment for as long as you own the property
- A line of credit you can use when needed
It is possible to opt for a combination of payment types, however, you’ll typically get more money by choosing to take out a fixed payment over a predetermined period.
Who is eligible for a reverse mortgage?
To obtain a reverse mortgage, you’ll need to be retired, and either own your home or have significant equity in it. If you’re unsure of how much equity you own, use Lendstreet’s handy calculator.
While every lender will have different requirements for being eligible for a reverse mortgage, you’ll typically need to be over the age of 60. Most providers have a maximum age of 90 years old.
How are reverse mortgage loans different from other types of loans?
Similarly to a traditional mortgage, a reverse mortgage loan lets homeowners borrow money by using their home as security, whilst being able to keep their names on the title of their home.
However, with a reverse mortgage loan, borrowers are not required to make monthly repayments, and instead, the loan is only repaid when the homeowner dies or no longer lives in the property.
Depending on the reverse mortgage loan terms, interest and fees are added to the loan balance every month, and the loan balance steadily grows over a period of time.
Homeowners are expected to still pay property taxes and insurance, stay in their property during the proposed period, and maintain the home.
Reverse mortgage Pros
Reverse mortgages can be a lifesaver if you’re struggling to pay off a line of credit or loan balance. If you’re still unsure, here are the main reverse mortgage pros.
Secure your retirement income with monthly payments or a lump sum
Reverse mortgages can supplement your retirement income and allow you to access your home equity through monthly payments, a lump sum, or a line of credit.
Stay in your home
With a reverse mortgage, there’s no need to move out of your home. Instead, you can access your home equity and receive a lump sum or monthly payments without having to sell your property.
Pay off your existing home loan balance
Most retirees see a significant drop in their income, which can make monthly mortgage payments much more difficult to manage. By taking out a reverse mortgage, you can access home equity to pay your bills.
No tax liabilities
Money from reverse mortgages is considered a loan rather than income, meaning you won’t pay tax on your released funds, and you’ll receive the full loan proceeds.
Reverse Mortgage Cons
While reverse mortgages are beneficial for retirees needing supplementary cash, there are some potential cons you should be aware of, namely:
Rising reverse mortgage balance
Like a normal mortgage, lenders will charge many fees when taking out reverse mortgages, such as an insurance premium, an origination fee, as well as servicing and third-party fees. You’ll also pay interest on your balance owed which will increase over time.
Less equity
Reverse mortgages take equity from your home, so you’ll own less of your property value for both you and your heirs.
For professional mortgage advice, contact Lendstreet!
If you’re ready to take out a reverse mortgage, or you simply want advice, contact Lendstreet today. Our Lendstreet mortgage brokers are dedicated to finding you the right loan to help meet your needs and goals.
For more information on equity release loans, read our advice here. Alternatively, contact one of our friendly professionals today or book a free discovery call here.
FAQs
What are the tax implications of a reverse mortgage?
Reverse mortgage payments are considered as loan proceeds and not income, meaning you have no tax obligations.
How might a reverse mortgage affect your benefits?
If the reverse mortgage is used to supplement your regular income stream and spent on living expenses, it will not affect your pension. It is not counted as income and instead is classed as loan proceeds.
What happens if you sell a house with a reverse mortgage?
If you sell your home while you have taken out a reverse mortgage, you’ll be obligated to pay back the money you borrowed plus interest. Luckily if your loan balance is less than the sale value, you keep the difference.
Do you need a good credit score to get a reverse mortgage?
Since monthly payments are optional, having a good credit score isn’t necessary. However, you’ll still be subjected to a credit check as part of the loan assessment.
Who is a bad candidate for a reverse mortgage?
If you’re currently married, and your partner isn’t retired, a reverse mortgage is not made for you as non-borrowers can’t get money from the reverse mortgage once you die.
