Retirement might seem years away, but we all know how the sands of time seem to accelerate with the passing years. With more fiftysomethings than ever facing the fact that they will enter retirement with considerable debts, perhaps it is something we all need to think about sooner rather than later.
The concept of the reverse mortgage is something of a new phenomenon here in the UK, but is rapidly growing in popularity, having taken the USA by storm as a way for retirees to release equity from their homes in order to enjoy a prosperous and worry-free retirement. Reverse mortgage arrangements are being offered by a growing number of mortgage lenders on both sides of the pond – could they represent a silver bullet for the pension crisis? Let’s take a look.
How does it work?
As the name suggests, a reverse mortgage is the reverse of a conventional mortgage, in that money is borrowed against the equity that they have already accumulated on your home. The borrower receives the money either in a lump sum, as monthly payments or as a flexible line of credit to draw money as and when needed.
The biggest difference between a reverse mortgage and a traditional one is that the loan is only repaid when the last living homeowner either sells the property or passes away.
Who can get one?
In general, reverse mortgages are available to those over a certain age (typically 62) who owns their home outright. Some lenders also offer them on homes where there is a mortgage balance outstanding, depending on the amount.
As with any form of financial credit, you need to carefully evaluate the interest rate. As there are no regular repayments, the amount owed will increase over time. You also need to look at the upfront fees, which can be considerable.
Finally, there is of course the fact than many retirees wish to pass their property on to family after they are gone, which might not be an option if a reverse mortgage has been taken out.
A silver bullet?
Given the state of pensions and the broader financial landscape for retirees, it is no surprise that reverse mortgages are becoming so popular. The majority of pensioners have considerable equity in their homes, and this provides a way to put it to perfect use. However, taking out a reverse mortgage is a big decision, so it is always wise to take professional independent advice before making a decision.