What is a Reverse Mortgage?

July 19, 2016
Simon Allen

A reverse mortgage allows older home owners to access some of the equity in their home to fund living costs, home repairs, medical fees, travel or other expenses.

There are a number of key differences between a normal mortgage and a reverse mortgage. Key features of a reverse mortgage include :-

-         The interest on the loan is added to the principle, with no repayments being required until the borrowers die or sell their home. At this point the sum borrowed plus the accumulated interest must be repaid.

-         Since no monthly repayments are required, it is not necessary to demonstrate a level of income sufficient to repay the loan.

-         The amount that can be borrowed will be determined by the value of the property, the borrowers age and the lender’s policy. Borrowers must generally be over 65 and the percentage of the value of the property that can be borrowed will increase with ages. For example, a 65 year old may be able to borrow 25% of the property value, while a 90 year old may be able to borrow 40% (specifics vary between lenders).

-         The borrowed money can be taken as a lump sum or a regular income stream.

It is important to note that the compounding interest on the loan may reduce the amount of equity retained in the property. For example, a loan of $100,000 at an interest rate of 6.5%, will grow to $191,000 after 10 years.

Taking a reverse mortgage is a major financial decision and it is vital that anyone considering one takes independent financial advice.

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