B24 - Reverse Mortgage/Home Equity Release
Reverse mortgages and home equity release schemes are designed to provide older people who own their own home with access to some of the monetary value of their home.
Essentially, the home-owner enters into a mortgage arrangement where they are lent money based on the idea that the lender will be repaid when the property is sold. Interest
accrues against the loan.
The home-owner can receive their loan as a lump sum (all at once) or, more commonly, in regular modest payments.
Generally, there are no restrictions around how the loaned money should be used. Homeowners commonly used the money they borrow to upgrade their homes, to travel or to cover
medical expenses. How much money you can borrow is calculated on the basis of your age and the market value of your home.
- Older people who are 'asset rich' but 'income poor' can free up some of the money invested in their home while continuing to live there.
- This can be a good source of funding for individuals who own their home outright and wish to increase their income to be more comfortable in retirement.
- You are likely to be charged a higher interest rate on this type of borrowing.
- As with any non-standard financial product, there are typically additional upfront fees (eg, origination fee) and costs associated with entering into an agreement with a
- Some of these schemes do not provide the protection of a lifetime occupancy guarantee - where you remain in your home until you die or you choose to leave. Without this
guarantee, your residence is not protected.
- Some schemes do not have a 'no negative equity' protection. This means that you or your estate could end up having to pay back more money, as a result of interest charges,
than you make from selling your property.
What do I need in order to take this option?
- You need to own your property 'free-and-clear', without an existing mortgage or with a relatively low existing mortgage.
- You must feel comfortable with reducing the amount of money that your home will provide when it is sold and that can be transferred to any heirs on your death.
- You must recognise and accept that, although these schemes do provide an income stream, they will reduce your asset-based wealth.
Could this option limit my future choices?
Yes, your ability to sell and buy another home in the future may be affected, particularly if the loan is substantial or the housing market has experienced a decline in
values and your home's value has dropped as a result.
For more information