Our homes tend to be the biggest investments we ever make, pouring our hard won cash into first saving a deposit and subsequently paying off a mortgage over the years. For many hardworking individuals and couples, this doesn’t leave a lot left over and putting aside additional savings for retirement can be a real struggle. Reverse mortgages were created by the U.S. Department of Housing and Urban Development as a means for pensioners (the minimum age for applicants is 62) on limited income to release the capital held in their property. It was envisaged that the primary incentives to take a reverse mortgage loan would be to help cover monthly living expenses or pay for unforeseen medical or care services not covered by the individuals insurance. However, there are no actual restrictions in place and recipients of reverse mortgage loans may spend the money as they see fit.
A reverse mortgage loan is a loan which is taken out against a property, though full ownership of the property remains with the borrower. Rather than a lump sum being paid out that the borrower returns in installments, the borrower receives regular instalments over a period they agree on when taking the loan. The loan is paid back at the point when the property is either sold or has been vacant for at least a year. As is the case with any financial or loan product there are pluses and minuses to reverse mortgage loans that must be weighed up by anyone considering applying for one. We’ll take a look at many of the main considerations here:
- No repayments are made during the term of the loan with loan value, insurance and interest all payable at the end of the loan’s term, usually when the property is sold.
- Instalments are not taxable as income.
- The lender’s financial assessment is based on the property’s value and not the income of the applicant.
- Ownership of the property is retained by the borrower until they sell the home, move or vacate it.
- If property prices change and the eventual sale of the property does not cover the loan’s repayment your heirs are not liable to make up any shortfall. This is insured against as part of the terms of the loan.
- Unless the loan can be repaid by other means it will be settled by the sale of the property when the borrower, or last remaining borrower, passes away or has vacated the property for at least a year, usually due to having moved into a care facility. This means that the property will not be inherited by the borrower’s heirs.
- Medicare payments and Supplemental Security Income can be affected by reverse mortgage loan installments.
- Because all interest is paid at the end of the loan’s term it cannot be used as a deductable from income taxes during the term of the loan.
- Interest rates and service charges tend to be higher for reverse mortgage loans than for other equity loans or mortgage products.
- Once the maximum value of equity you can take out of your property in the form of a reverse mortgage loan has been reached you may be left with limited options in terms of your future needs.
Part of the application process for taking out a reverse mortgage loan is to go through a counseling session where these advantages and disadvantages will be gone over and made clear to you.